House rent allowance or as popularly known as HRA is considered to be the main component in computation of total CTC of an employee. Based on city’s living conditions, employer use to fix employee’s house rent allowance before sending an offer letter.
As House Rent Allowance is part of employee’s salary, the entire amount as received is taxable in the hands of employee. However, income tax act 1961 has allowed a portion of such house rent allowance as exemption under section 10(13A) read with rule 2A of income tax rules.
This means taxable House Rent Allowance would be the net amount that we get after deducting house rent allowance exemption from the actual house rent allowance received.
Employee’s place of residence is the most significant factor while calculating house rent allowance exemption under section 10(13A) read with rule 2A.
If you are living in metro cities then HRA exemption will be higher compare to a non-metro city.
Before getting into how to compute house rent allowance exemption, let us first know those conditions that an employee needs to fulfill to get HRA exemption.
Conditions to be fulfilled to get HRA or House Rent Allowance exemption
Here are certain conditions that an employee needs to fulfill to get eligible for HRA exemption;
- Employee must be staying in a rented accommodation
- Employee is in receipt of house rent allowance from employer
- Employee is paying rent to landlord for staying in a rented accommodation
If you analyze these conditions then employees staying in their own house and getting house rent allowance from employers are not eligible to claim HRA exemption. This means entire house rent allowance received will be taxable.
How to calculate HRA exemption
House rent allowance exemption computation is very easy. You are required to remember following three things and then whichever is lesser will be allowed as exemption.
This means House rent allowance exemption is lower of followings;
- Actual HRA received from employer by employee
- Actual rent paid by employer to employee minus 10% of employee’s salary
- 50 % of salary in cases where employee live in a metro city or 40% of the salary in cases where employee lives in any non-metro cities.
A metro city means Chennai, Bangalore, Mumbai and Delhi. All other cities in India including Hyderabad, Bengaluru, Ahmadabad, Pune, Chandigarh, Jaipur and Lucknow will be treated as non-metro cities.
In the above calculation, you will find the term salary on which you have to calculate 10% or 50% or 40% as specified. In these cases, you are not required to take the entire salary amount. Here salary means basic pay plus dearness allowance forming part of salary if the terms of employment so provide.
Note: House rent allowance exemption will be available for periods during which the rented house is occupied by employee and not for any other periods.
Documents to be submitted to employer for HRA exemption claim
Employer will take a self declaration from employees at the beginning of the financial year to know exactly how much rent employees are paying to their landlord and based on that HRA exemption as discussed above will be calculated.
At the end of the year, based on employee’s self declaration, employer will ask you for documentary proofs. At that time, you need to provide following documents in support of HRA exemption claim;
Complete 12 month’s rent receipts are not required to be submitted to employer. Employee can submit two receipts, one for the beginning of the year and the other one for the end of the financial year.
Example showing House Rent Allowance exemption calculation
Mr X is getting basic salary of Rs. 5000 per month and Rs. 1000 as Dearness allowance out of which 40% is forming part of salary. He also gets Rs. 3000 per month as house rent allowance and pays Rs.2000 per month as rent of the house in Chennai.
First we have to calculate salary for the purpose of HRA exemption before calculating actual house rent allowance exemption.
Salary = 5000*12+ (40% of 1000*12) = Rs. 64800
As discussed we have to calculate three components for HRA exemption calculation and the lesser will be taken as exempted amount. Let us calculate these components;
- Actual HRA received – Rs. 3000*12 = Rs. 36000
- Actual rent paid by employer to employee minus 10% of salary – (2000*12) minus (10% of Rs.64800) = Rs. 17520
- 50% of salary – 50% of Rs. 64800 = Rs. 32400
Out of these three values, Rs. 17520 is lesser. This means Rs. 17520 will be allowed as HRA exemption and balance amount will be taxable i.e. Rs. 6480 (24000-17520)