Calculating HRA exemption accurately is not easy. To summarize, HRA exemption is calculated as the least of the following -
- The amount actually paid as HRA.
- Rent paid minus 10% of the basic salary.
- 50% of the basic salary if the rented accommodation is in a metro city, and 40% otherwise.
These rules are simple enough, but it can get a little complicated when a payroll platform like Opfin tries to calculate the HRA exemption for the entire year. Any of the following complicates matters -
- If the employee moves to a new accommodation which leads to a change in rent.
- If the employee’s salary changes.
- If the employee’s basic salary changes.
- If there is a break in rent or in salary.
Previously, Opfin would ask employees to declare their rent and would calculate HRA monthly and project it into the future. This approach works, but there would be issues if an employee forgot to declare their rent. Making changes retrospectively wasn’t trivial and required an email to support. Also, you could not enter details of multiple rented accommodations through the year.
Some other platforms get around this problem by calculating the exemption annually - take the total HRA, basic salary and rent paid, project for the future, and use it to calculate exemption. This approach also suffers from being inaccurate (what is the employee moves from a metro to a non-metro in the middle of the year?).
To fix all of this, Opfin has adopted a new method for HRA calculation which uses the best of both these approaches. First, we have now given the option for employees to declare multiple rents, so we can capture all the details if they move accommodations. Second, HRA is calculated monthly, so that any variations in salary and rent etc are correctly accounted for. Third, if any details change in the future, the entire calculation is recomputed so that we grant the correct HRA exemption. All of this combined results in perfect flexibility and accuracy.