What is House Rent Allowance and how is it calculated?

House rent allowance, often abbreviated to HRA, is an allowance that’s paid by an employer to the employee as a part of the latter’s salary. As the name clearly suggests, this allowance is paid with the intention of making it easier for salaried employees to afford a place of accommodation in the metro or non-metro areas where their place of work is situated.

Is HRA taxable?

The answer is both yes and no. Essentially, HRA is exempted under section 10(13A) of the Income Tax Act. However, the amount of exemption is determined to be the minimum of three amounts, calculated as per the rules explained below.

How is HRA exemption calculated?

HRA exemption is limited to the minimum of the following three values.

• The actual HRA received during the year
• Actual rent paid during the year in excess of 10% of the annual salary
• 50% of annual salary if the assessee (person who is supposed to pay taxes) rental accommodation is in a metro city like Mumbai, Delhi, Chennai, and Kolkata), or 40% of annual salary if the assessee’s rental accommodation is in a non-metro region

What does the term “salary” include?

For the purpose of calculating HRA exemption for salaried employees, the term salary includes the following elements.

• Basic component
• Dearness allowance forming part of retirement benefits
• Commission received as a percentage of turnover

Special scenarios involving house rent allowance

While the provisions of section 10(13A) are clear and concise, there may arise certain situations where the extent of HRA exemption may seem unclear. Here are some such scenarios resolved.

• Is HRA exempt if you’re residing in your own house?

  If you live in your own house and have no rental expenditure, you’re not eligible to claim HRA exemption under this section.

• What if you own a house in one city but are residing in a rental accommodation elsewhere?

  In case you own a house in one city, but reside in a rental accommodation elsewhere because of your job location, you’re eligible to claim exemption of house rent allowance as explained above.

• Can you claim exemptions involving both HRA and home loans?

  Yes. If you own a house property for which you’ve availed a home loan, and you stay in a rental accommodation elsewhere, you can claim exemptions on the home loan’s principal repayment as well as on the HRA earned.

• What happens if your employer does not pay you any HRA?

  Salaried employees who reside in a rental accommodation but don’t receive HRA from their employer cannot claim HRA exemption under section 10(13A). However, there is an option offered under section 80GG of the Income Tax Act. Under this section, self-employed people and salaried employees who aren’t paid HRA can claim the least of the following as a deduction.
  • Total rent paid minus 10% of basic salary.
  • Rs 60,000 per year (Rs 5,000 per month).
  • 25% of the adjusted gross total income.