HRA, or House Rent Allowance, is an allowance paid by the employer to the employee as part of his salary. This allowance is paid to salaried employees to ease the burden of buying a house in the metropolitan or non-metropolitan area where their place of work is located.

Is HRA taxable?

The answer is both yes and no. Essentially, HRA is exempted under Section 10(13A) of the Income Tax Ac, 1961. However, the amount of exemption is determined to be a minimum of three amounts.

How is HRA exemption calculated?

HRA exemption is limited to the MINIMUM of the following three:-

  • The actual HRA received during the year.
  • Actual rent paid during the year in excess of 10% of the annual salary.
  • 50% of the annual salary if the rental house is in a metro-politician city like Mumbai, Delhi, Chennai, and Kolkata.
    OR
    40% of annual salary if the rental house is in a non-metro-politician region.
  • What does the term “salary” include?
  • For the purpose of calculating HRA exemption for the salaried employees, the term salary includes the following elements:

Basic Salary

Dearness Allowance (DA) forming part of retirement benefits

Commission received as a percentage of turnover

Illustration:

Let’s take an example for better understanding of the HRA calculation for employees. Mr. Rakesh Shah resides in Mumbai in a rented house and is paying a rent of ₹ 12,000 per month. This is what his pay slip looks like:

Earnings Amt Deductions Amt

Basic Salary

50,000

PF

2000

HRA

14,000

Professional Tax

200

Conveyance

3,000

Special Allowance

2,000

Medical expenses

1,250

LTA

5,000

Total Earnings

75,250

Now let us see what is Mr. Rakesh’s HRA that is exempt from Income Tax, we have the following information:

  • His Basic Salary is ₹ 50,000 per month, which will be considered since there is no commission or Dearness Allowance (DA)
  • HRA provided by the company is ₹ 14,000 per month
  • 10% of the Annual Basic Salary comes to ₹ 60,000
  • Now, let’s calculate the same in the following three scenarios:
  • Amount received as HRA from employer = ₹ 14,000 X 12 (months) = ₹ 168,000
  • Actual rent paid less 10% of basic = (₹ 12,000 X 12) – ₹ 60,000 = ₹ 84,000
  • 50% of basic salary since he lives in a metro = ₹ 300,000
  • Hence, based on the above calculation, it is evident that the HRA amount, which will be exempt from tax for Mr. Rakesh, will be ₹ 84,000 as that comes to be the least of the three amounts in the scenarios stated above.

While the provisions of Section 10(13A) are clear but still some of you might have certain questions where the extent of HRA exemption may seem unclear. Here are some such FAQs answered for you.