Your monthly salary is made up of different parts such as basic pay, travel allowance, and other benefits. One key component is House Rent Allowance (HRA), which is provided to employees who stay in rented accommodation. This allowance helps you manage your rental costs and may also reduce your taxable income, making it financially helpful for many salaried individuals. Employees in India commonly receive HRA as part of their salary structure.
In this article, we will explore what HRA means, how it works, how the amount is calculated, and the steps involved in claiming tax benefits linked to it.
What is HRA (House Rent Allowance)?
House Rent Allowance (HRA) is a salary component provided by an employer to support employees who live in rented accommodation. It helps individuals meet their rental expenses and also provides a tax benefit. The amount of HRA depends on factors such as basic salary, the actual rent paid, and whether the employee lives in a metro or non-metro city. HRA is partially exempt from tax under Section 10(13A) of the Income Tax Act, 1961, subject to certain rules. The exemption amount is calculated by comparing actual HRA received, rent paid minus 10% of salary, and a fixed percentage of salary depending on the city.
Who can avail of HRA?
HRA is only available to people who earn a salary and receive an HRA component as part of their total pay. If you are living in a rented property, you may claim tax benefits on your HRA amount. This exemption helps you lower your taxable income. However, HRA is not available for self-employed individuals or business owners. They cannot claim HRA even if they live in a rented house. If you meet the eligibility, you can enjoy both financial and tax-saving benefits through your HRA.
HRA for the self-employed
Self-employed individuals cannot claim HRA under Section 10(13A). However, they may still receive tax deductions for rent payments through Section 80GG. This section is specifically designed to help those who are not salaried but still pay rent for staying in a rented house or flat.
HRA for salaried individuals
If you are a salaried individual who receives HRA as part of your pay package, you may claim tax exemption under Section 10(13A) and Rule 2A of the Income Tax Act. The exemption depends on your salary, rent paid, and whether your city is categorised as metro or non-metro.
Why is HRA important?
HRA plays a vital role in the salary structure of employees who live in rented homes. With rent being a major expense, especially in large cities, HRA offers financial relief and supports better budgeting. It also provides tax savings when claimed correctly. Here’s why HRA matters:
- Helps manage rent payments: HRA offers financial support to cover monthly rent, reducing your out-of-pocket burden.
- Offers tax benefits: When you meet the required conditions, you can claim HRA exemption, which lowers your taxable income and helps you save money.
HRA calculation methods
Calculating HRA involves several methods, each with its own set of conditions and considerations. The commonly used methods include:
- Actual HRA received: This method involves calculating the actual amount of HRA received from the employer. The least of the following amounts are considered for deduction: actual HRA received 50% of salary for those residing in metro cities or 40% for non-metro cities, and the excess of rent paid over 10% of salary.
- Rent paid minus 10% of salary: Under this method, the difference between the rent paid and 10% of the salary is considered for HRA deduction. The least of the following amounts are deductible: rent paid minus 10% of salary, actual HRA received, or 50% of salary for metro cities and 40% for non-metro cities.
- 50% of salary: In this method, 50% of the individual's salary is considered for HRA deduction, provided they reside in metro cities. For non-metro cities, the percentage is reduced to 40%.
HRA calculation example
Below is an illustration based on the case of Mr. Chowdhury, who lives in Mumbai and pays Rs.10,000 monthly rent (Rs.1.2 lakh annually).
Components |
Monthly (Rs.) |
Annual (Rs.) |
Basic salary |
30,000 |
3,60,000 |
HRA |
13,000 |
1,56,000 |
Conveyance allowance |
2,000 |
24,000 |
Special allowance |
3,000 |
36,000 |
Leave Travel Allowance (LTA) |
5,000 |
60,000 |
Total earnings |
53,000 |
6,36,000 |
Step-by-step HRA exemption calculation
- Actual HRA received: Rs.1.56 lakh
- 50% of salary (Basic + DA) as he lives in a metro city: Rs.1.80 lakh
- Rent paid – 10% of salary: Rs.1.2 lakh – Rs.36,000 = Rs.84,000
The exempted HRA will be Rs.84,000, which is the lowest of the above three values.
The balance HRA amount will be taxable as per Mr. Chowdhury’s income tax slab.
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Eligibility criteria for HRA
To claim HRA benefits, certain eligibility criteria must be met:
- The individual must be a salaried employee receiving HRA as part of their salary package.
- They must pay rent for accommodation where they reside.
- If the rent paid exceeds a certain threshold, the landlord's PAN details must be provided.
- HRA cannot be claimed if the individual resides in a self-owned property.
- Rent receipts and other relevant documents must be maintained as proof of rent paid.
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