HRA and its tax impact

House Rent Allowance or HRA is one of the main salary components of an individual. A salaried employee staying in a rented house can claim HRA from his employer and avail of an income tax exemption under section 10(13A) of the income tax act.

How is the exemption amount calculated?

 The exemption is available only on the rent actually paid and is restricted to a minimum of:

  1. The actual HRA received
  2. The actual rent paid less 10% of salary ( basic + DA)
  3. 50% of salary if the rented house is in a metro-Mumbai, Delhi, Chennai or Kolkata and 40%  for other cities

To understand this better, let us take an example.

Mr. A lives in Mumbai and has a salary (Basic + DA) = Rs. 40,000 pm ; HRA = Rs 15,000 pm; actual rent paid= Rs. 16,000 pm

  1. Actual HRA received = Rs. 15,000/-
  2. Actual rent paid – 10% of salary = 16,000 – 4000 = Rs 12,000/-
  3. 50 % of salary = Rs. 20,000/- pm

Hence he can claim Rs 12,000/- as tax exemption and the balance HRA of Rs. 3000/- will be taxable.

  •  To claim this exemption, the employee has to submit the rent receipts or a copy of the rent agreement. For low monthly rents of up to Rs 3000/- pm , these documents are not required.
  • If the employee stays in his parents’ house, he can pay rent to them and claim tax exemption.
  • But remember, this rule does not apply to spouses – one cannot pay rent to his or her spouse and claim exemption, the logic being the husband and wife are supposed to stay together.

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