HRA Exemption Calculation

House Rent Allowance (HRA) is generally paid as component of salary package. This allowance is given by an employer to an employee to meet the cost of renting an accommodation. 

Section 10(13A) of the Income Tax Act provides for exemption of HRA based on certain rules. In order to claim HRA exemption, the following basic conditions should be met:

1. You should be staying in a rented accommodation.
2. The house should not be owned by you or your wife.
3. You should be paying the rent.

What is the exemption amount? 

Minimum of the following three is exempt:
1. Actual HRA received
2. Rent paid minus 10% of Salary
3. 50% of salary if you live in Mumbai, Delhi, Kolkata or Chennai, otherwise 40% of Salary

Salary means Basic Salary + Dearness Allowance + Commission based on a fixed percentage of turnover achieved by employee. Most of the private sector companies don’t have the last two components in the salary package.

Simple example: Basic Salary: Rs 30,000 per month, i.e. Rs 360,000 for the year
HRA: Rs 10,000 per month, i.e. Rs 120,000 for the year
Rent paid: Rs 8,000 per month, i.e. Rs 96,000 for the year (House in Chennai)

HRA exemption:

HRA received: Rs 120,000
Exempt: Minimum of following,
1. Actual HRA: Rs 120,000
2. Rent less 10% of Salary: Rs 96,000 – (10% of 360,000): Rs 60,000
3. 50% of Salary: Rs 180,000

Thus Rs 60,000 HRA is exempt and balance Rs 60,000 HRA is taxable. Thus out of Rs 480,000 Salary package; Rs 420,000 is taxable and Rs 60,000 is exempt (For the time being let’s ignore all other exemptions under Income Tax Act).