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House Rent Allowance (HRA)

House Rent Allowance is a component of the salary provided by the employer to his/her employee. If you receive HRA as part of your salary and you live in a rented accommodation, then you can claim full or partial HRA exemption u/s 10. However, HRA is fully taxable if you don’t live in a rented accommodation. How to calculate HRA? Your HRA depends upon the following 4 factors. They are:
  • Salary
  • HRA component
  • Rent Paid
  • Location of your rented house
Tax exemption on HRA is least of the following: 1) Actual HRA received 2) Actual rent paid reduced by 10% of salary 3) 50% of basic salary if the taxpayer is living in a metro city 4) 40% of basic salary if the taxpayer is living in a non-metro city Since the least of the above is exempt from tax, you can ask your employer to restructure your salary to get maximum tax benefit.
                                                                                                  Pay rent and save taxes
What if my employer does not provide me with the HRA? If you are making payments towards rent for any furnished or unfurnished residential accommodation occupied by you, but do not receive HRA from your employer, you can still claim the deduction and that would be under Section 80GG. Conditions that must be fulfilled to claim this deduction:
  1. You should be self-employed or salaried
  2. You have not received HRA at any time during the year for which you are claiming 80GG
  3. You or your spouse or your minor child or HUF of which you are a member – do not own any residential accommodation at the place where you currently reside, perform duties of office, or employment or carry on business or profession.
In case you own any residential property at any place other than the place mentioned above, then you should not claim the benefit of that property as self-occupied. That other property would be deemed to be let out in order to claim the deduction under section 80GG. Refer our Articles on Income from house property where we have discussed this in detail. As per section 80GG of the Act, the least of the following will be considered as tax-free:
  1. Rs 5,000 per month;
  2. 25% of adjusted total income*;
  3. Actual Rent less 10% of adjusted total Income*
*Adjusted Total Income means Total Income Less long-term capital gain, short-term capital gain under section 111A and Income under section 115A or 115D and deductions 80C to 80U (except deduction under section 80GG). How to Claim HRA When Living With Parents? Where you are staying in your parents’ house and your parents are owner of the same, you can still claim the HRA. You can pay the rent to your parents and claim the allowance provided. You will have to enter into a rent agreement with your parents, provide their PAN card to your employer, also generate rent receipts. In this case, please note that the rent amount that you showing as payment to your parents will be taxed as rental income in their hands. Is my landlord’s PAN mandatory to claim HRA? Yes, it is where your annual rent crosses 1 lakh INR. If your landlord does not have a PAN, then you (as the employee) have to obtain the declaration to this effect from the landlord along with  the name and address of the landlord. A Format of Deceleration May be as follows :- Date To Name & Address DECLARATION I ____________(Full name and address of the declarant) aged ____ do hereby declare that I have leased the Flat No._______________________________ From 1st April’2018 to 31st March’2019 to ___________( Name of lessor) at a monthly rent of  Rs. _______/- ( __________________ only). Further I do hereby declare that my total income during the financial year 2018-2019 did not exceed the statutory  limit prescribed under Income tax Act,1962 and have not assessed to tax and does not have a PAN card . Verification I,_________________ do hereby declare that what is stated above is true to the best of my knowledge and belief. Verified today, the _____________ day of _________________
Date : ________________Place : ________________(Name of the declarant)
HRA is one of the most common component of a salary structure and hence, you must claim the same where you are staying on rent. If you are not staying on rent and living with your parents, it is important you analyse the overall family’s taxability before declaring that you are paying rent to your parents.
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How much cover is required for Term Insurance?

Have you looked at the insurance aggregator’s website and wondered how much insurance cover you should take? At the preliminary view, an insurance cover of INR 50 lakhs for someone who just started working also looks very good and an insurance cover of INR 1 crore may not be enough for someone who is married with 1 child. The amount of cover varies from person to person based on their financial background, situations, responsibilities, lifestyle etc.

You can read our Article on 10 things to note before buying term insurance which will give you an exact idea of what is term insurance and all the things that you must focus on before investing in one.

We have listed below the process to compute your term insurance cover.

Step 1 – Use your actual Income

You are opting for term insurance to ensure that the financial life of your loved ones is not impacted. Based on this, your term insurance cover must compensate for the income/earnings that you were providing to your family.

Your monthly income is the minimum amount that your financial dependents must get from the term insurance cover.

Accordingly, where your income is INR 1 lakh per month, your annual income would be 12 lakhs. Your insurance cover amount must be such that on investing it in a debt product of around 9% return, you get the annual income value as returns.

For example:

Income – 1 lakh per month

Annual income – 12 lakhs

Return % – 9%

Amount of cover – (12 lakhs*100)/9 = 1.33 crores

On an investment of INR 1.33 crores in a debt financial product which gives a return of almost 9% per annum, a return of INR 1 lakh per month (i.e. 12 lakhs per annum) will be received.

1.33 crores X 9% pa = 12 lakh per annum i.e. 1 lakh per month.

Post taxes of around 20% that would be INR 80,000 per month which shall be equal to the in-hand salary of the person with the monthly income of INR 1 lakh.

Reverse Calculation

  • You can also do a reverse calculation, where you may take the in-hand salary of say INR 1 lakh (this would be a post-tax number)
  • Accordingly, the pre-tax would be INR 1.25 lakhs
  • You have to earn INR 1.25 lakh for 12 months i.e. INR 15 lakhs.
  • The cover amount must be such that it gives 15 lakhs as 9% of the cover amount.
  • Using the above formula = (15 lakhs*100)/9 will give you 1.66 crores.

Hence, you should take an insurance cover of INR 1.66 crores.

Step 2 – Loans and other liabilities.

You should add the value of your total loans and other debts due to your insurance cover. This will ensure that there is no fallout of debt on your dependents.

In this case, if you already have home loan insurance, verify if it is sufficient to cover the entire outstanding loan.  If yes, then you need not add that amount to your term insurance cover, if not then add the loan amount to your insurance cover.

If there are any other loans or liabilities that you have taken from anyone, add that amount to your term insurance cover amount. For example, a car loan or a personal loan.

Step 3 – Reduce your assets

Where you have any investments made in the form of mutual funds or any other investments for your retirement, reduce the value of the same from your insurance cover amount.

In this case, please keep in mind that the value of the assets like the house you are residing in or depreciating assets like your car should not be considered. These are the assets that are used by your family/people.

Step 4 – Important Events

This includes setting aside a lump sum amount for important events or milestones of life such as education of your child, or their marriage or a business set-up for your partner. Calculate roughly how much you would need for your such events (Do include inflation into consideration).

For example, if you feel that today when your child is 5 years old, you would need INR 20 Lakhs for their education 15 years from now. Ensure that this INR 20 Lakhs is not based on the education cost today, but an estimated cost of the same 15 years from today.

Final Working

(Your annual income*100)/ return rate of a debt product + outstanding liabilities – Investments (saleable assets) + Inflated cost of important futuristic life events

Conclusion

Many insurance aggregators and their website calculate the term insurance cover that may be applicable to you.  These calculators work on a simple formula of the time value of money. Basically, it’s the present value of all the future income that you are expecting to earn until you retire. These easy to use calculators are available on the websites of all insurance providers and require certain information from your end like your current age, current annual income and expected future rate of return.

These calculations may not fulfill your entire insurance needs specific to your requirements. You must use an adequate method otherwise even after obtaining term insurance your family/dependents will not be free of their financial liabilities.

The best way to buy term insurance is to directly obtain the same from the website of the insurance provider. Refer to our Article http://www.wealthcafe.in/myths-about-buying-insurance-online/



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