House Rent Allowance (HRA)

What is House Rent Allowance (HRA)?

House Rent Allowance (HRA) is one of the components of the employer's compensation package to supplement employees' expenses to rent a house. This is generally part of salary systems, particularly in India, where many people live in rented places. HRA is usually combined with the general remuneration package and is issued to assist workers in catering for housing expenses.

The size of HRA for workers is different from worker to worker since the determination is made by salary level, location of where they live, and company policy. Employers may offer these accounts as amounts allocated towards them or as a percentage of the employee's basic salary. HRA is often tax deductible or exempted through any kind of government mechanism. The employees are generally asked to submit the rental receipts (or any other document as proof) of the housing expenses they have been spending to avail of HRA benefits.

Example

The compensatory angle of HRA could reflect the situation when an employer allocates employees with monthly cash offers to provide accommodation expenditures. Let's now postulate a worker named Sarah, who is employed under the same conditions in a city where housing prices are higher than average. On the other hand, Sarah can receive an HRA allowance from her employer worth 30% of her basic salary, which will eventually be used to pay the rental costs.

Let us assume Sarah's basic salary to be $3000 (per month). Thus, her HRA allowance per annum amounts to $900. For Sarah’s apartment, this costs $1,200 per month. She can use $900 from her fair HRA allowance as her rented amount, reducing her out-of-pocket expenses to $300. The other segment of the HRA receivable that is not utilized for the rent payment could be subject to tax exemptions or tax deductions according to the existing tax laws of her country. This example shows that HRA also boosts transiting workers as this option helps them cut their expenses.