Salary Calculation Confusion: Should HRA Be Deducted Before or After Earnings?

Salary Calculation Query

We have fixed gross salaries. Based on that, 60% will go into Basic, AED 750 for HRA (if staff opts for staff accommodation, then it will be deducted), and the remaining amount as Other allowance. If the staff is on leave for more than one day, it will be considered as LOP. The calculation is as follows:

For example, if the salary of the staff is AED 10,000:

= 10,000/30*29 = 9,666.66 (If the staff is not in company accommodation)
= 10,000 - 750 = 9,250/30*29 = 8,941.666 (If the staff is in company accommodation)

Now, the query is: do we have to calculate the salary after deducting HRA or first calculate the earnings and then deduct HRA?

Kindly advise.

Regards,
Pooja M B

In salary calculations, particularly when dealing with components like House Rent Allowance (HRA), the approach can vary depending on the company's policy and the method preferred for payroll processing. Here’s a breakdown of two common approaches:

### Approach 1: Deduct HRA from Gross Salary First

1. Calculate Gross Salary: Start with the gross salary amount before any deductions.

Example:
- Gross Salary = AED 10,000

2. Deduct HRA: Subtract the House Rent Allowance (HRA) from the gross salary to get the taxable salary.

Example:
- Gross Salary = AED 10,000
- HRA = AED 750
- Taxable Salary = Gross Salary - HRA
- Taxable Salary = AED 10,000 - AED 750 = AED 9,250

3. Calculate Daily Salary: Divide the taxable salary by the number of days in the month to get the daily salary rate.

Example:
- Taxable Salary (for 29 days) = AED 9,250
- Daily Salary Rate = Taxable Salary / 29

This approach ensures that HRA is deducted first, and then the daily rate is applied to calculate salary for days worked or adjusted for leave without pay (LOP).

### Approach 2: Calculate Gross Salary, Then Deduct HRA for Housing

1. Calculate Gross Salary: Start with the gross salary amount before any deductions.

Example:
- Gross Salary = AED 10,000

2. Calculate Daily Salary: Divide the gross salary by the number of days in the month to get the daily salary rate.

Example:
- Gross Salary (for 29 days) = AED 10,000
- Daily Salary Rate = Gross Salary / 29

3. Deduct HRA for Housing: If the employee opts for company accommodation, deduct the HRA from the daily salary rate to adjust for the housing benefit.

Example:
- Gross Daily Salary Rate = AED 10,000 / 29
- If in company accommodation, deduct HRA: Daily Salary Rate = Gross Daily Salary Rate - (HRA / 29)

This approach calculates the daily salary rate first based on the gross salary, and then adjusts for the HRA if applicable, depending on whether the employee opts for company accommodation or not.

### Which Approach to Use:

- Company Policy: Check your company's payroll policy or consult with the HR or payroll department to determine which method they follow. This is important as it ensures consistency and compliance with company guidelines.

- Clarity and Consistency: Whichever approach is chosen, ensure it is applied consistently across all employees to avoid confusion and ensure fairness in payroll calculations.

Both approaches are valid and can be implemented depending on your organization's specific policies and practices. It's advisable to document the chosen method clearly in your payroll procedures for transparency and ease of reference.