What is House Rent Allowance (HRA) and how it is calculated

If you are a working professional, you would be aware that your pay slip consists of various components including Basic Pay, Leave Travel Allowance (LTA), Medical, Conveyance, Professional Tax, House Rent Allowance (HRA) & others. Most  salaried employees would have HRA in the salary and this is the significant element in the pay slip. Salaried individuals  who live in rented houses  can claim tax exemption on HRA under Section 10 (13A) of the Income Tax (IT) Act. Let’s get to know more about HRA in detail.

HRA or House Rent Allowance is a significant component of an individual’s pay slip. It is usually provided by the employer as an allowance for rental accommodation. The HRA amount varies in different cities. It can be  claimed by individuals living in  rented houses/flats and not by those who live in  self-owned houses/flats. 

Rules for individuals who do not receive HRA -

• The HRA exemption can be claimed under Section 80GG of the Income Tax Act, 1961.

• To claim deductions under Section 80 GG, one should furnish self-declaration using form 10-BA.

As per section 10 (13A) The minimum of the following amounts would be exempted –

• 1. 50% of the Basic Salary component if you live in a metro city like Mumbai, Kolkata, Delhi or Chennai (40% in a non metro city)

• 2. Actual HRA received from the employer

• 3. Actual rent paid reduced by 10% of the basic salary

Let’s understand how HRA tax exemption is calculated with the help of an example.

 Assuming that Miss. Aisha is a working professional & she is staying in Mumbai metro city in a rented flat for which she pays INR 10,000 every month. Now let’s take a look at her pay slip:

Here’s how the HRA in salary would be calculated. The exemption will be based on the least of the below amounts:

• Actual HRA component of salary: (INR 13,000 X 12) = INR 1.56 lakh  

• 50% of her basic salary, considering she stays in Mumbai metro city: (50% X INR 30,000 x 12) = INR 1.80 lakh  

• Actual rent paid minus 10% of basic salary: (INR 10,000 x 12) - (10% * INR 30,000 * 12) = INR 1.2 lakh – INR 36,000 = INR 84,000

Miss. Aisha is entitled for a tax exemption of INR 84,000 on HRA. The  remaining amount will be taxable as per the income tax slab rates. 

The easiest way to calculate HRA tax exemption is by using HRA online calculator provided by the tax department -

https://incometaxindia.gov.in/Pages/tools/house-rent-allowance-calculator.aspx

The New Tax Regime does not allow taxpayers to avail certain exemptions/deductions, and this includes HRA tax exemption.

You can claim HRA tax benefits only under Old Tax Regime. 

To know more about Tax regimes, read - Old Income Tax Vs New Income Tax Regime

• You should be staying in a rented property

• The employee has actually incurred expenditure on payment of rent in respect of residential property occupied by him

Key Takeaway:

• Now that you know about HRA and its tax benefits, you can take advantage of it if you are staying in a rented house. This is a good way to reduce your income tax liability. 

Disclaimer:

This blog has been prepared to provide the readers with general information and basic understanding of HRA. The Income tax definitions and rules keep on changing, so it is suggested that to avoid any doubt, the reader should cross-check all the facts and contents of the material.

Before taking any decisions, please consult your tax advisors.