HRA Calculation for Income Tax Exemption

June 27 , 2013

House Rent Allowance (HRA) is an important component of salary breakup because HRA gets income tax exemption. HRA forms part of your salary but it does not form part of your taxable income. Not all of the HRA might be eligible for tax benefit. Income tax laws have laid down rules to calculate how much of the HRA you get has tax exemption.

Formula for calculating HRA exemption amount

Calculation of amount of HRA on which you get tax exemption is the least of the following 3 numbers

Residents of Mumbai, Delhi, Kolkata, Chennai

Other residents

Actual HRA

Actual HRA

Rent paid minus 10% of salary

Rent paid minus 10% of salary

50% of salary

40% of salary

This calculation is according to rule 2A of the Act. It is implied that if your monthly rent is less than or equals 10% of salary, you get no HRA exemption.

Note that salary here means the Basic component. If salary includes DA and commission which is a fixed percent of turnover these also can be added for salary computation.

Claiming HRA exemption

Rental receipt has to be shown to the HR and they will deduct lesser TDS on your salary as applicable to your case. This exercise is usually done between January and March in companies.

Who cannot claim HRA tax exemption?

HRA exemption is allowed only if you have incurred rental expense that year. So needless to say, if you are staying in your own house you are not eligible for this tax benefit. But note that there is nothing stopping you from claiming HRA if you own a house but still pay rent for your accommodation. This could well be the case for those who stay away from their owned home. Such persons would be eligible for home loan EMI rebate as well as HRA benefit if they separately qualify for both.

Even if the house is in your spouse's name and you show some rent payment you would be legally ineligible because the law does not recognize financial consideration between spouses.

However rent paid to parents, siblings and others can be claimed for HRA tax exemption.

More conditions for HRA exemption

HRA tax exemption is allowed only for the period of the year when you actually stayed in rental accommodation. For example if you stayed on rented accommodation from December to March you can get this tax benefit only for those 4 months though you might have got HRA for other months as well.

Salary computation for HRA should include only those amounts which were due in that same year as when you had rental accommodation even if some amounts not due were received in that year. This means if you get, say arrears, from 2012-13 in 2013-14 it cannot be counted as part of salary in 2013-14 for HRA tax exemption calculation.

Want to buy a product? Get unbiased and best deals

Click here and get started

Article Ready Reckoner Concept Procedure