Income Tax (IT) deduction of House Rent Allowance (HRA).

House Rent Allowance or HRA is an allowance given by the employer to the employee for taking care of his rental or accommodation expenses. Note that your employer can choose to offer you HRA in your salary package irrespective of whether you live in a rented accommodation or in your own house. While most of us receive HRA, very few understand how the income tax department treats it. An understanding of the same will enable us to use it efficiently. House rent allowance exemption is dependant on a simple calculation but let us first look at the pre-conditions of who is eligible for HRA exemption.

Eligibility for House Rent Allowance (HRA) exemption

To be eligible for HRA exemption, you must first receive HRA in your salary and live in a rented accommodation for which you pay the rent. So if you live in a house you own, you will not be eligible for HRA exemption.

To claim HRA exemption:

  • you should receive HRA from your employer in your salary
  • you should live in a rental accommodation for which you pay the rent
  • your rent should be more than 10% of your salary

Calculation of House Rent Allowance (HRA) exemption

The actual HRA that is exempt from tax is the lowest of the three :

  1. Actual HRA received from employer
  2. 50% of salary in case of metros or 40% in case of non-metros
  3. Actual rent paid minus 10% of salary.

Definition of salary : In the context of tax exemption for House Rent Allowance, salary is defined as sum total of  basic, dearness allowance and a percentage of commissions of turnover achieved by employee.

House Rent Allowance

Example of House Rent Allowance (HRA) calculation

If X earns Rs 6,000/- basic salary per month and the dearness allowance is 80% of basic, let us try and find out what will be the taxable HRA if  X is staying in say, Delhi and his employer is paying an HRA of Rs 2,500 per month while he pays a rent of Rs 3,000 per month.

Let us calculate the salary first.

Salary = (6000*12) + (0.80*6000*12) = 1,29,600 Rs per annum.

Now let us get the three values as mentioned in the calculation above.

  1. Actual HRA received = 2500 * 12 = Rs 30,000.
  2. Since X is based in Delhi, we will take 50% of his salary, which comes to 1,29,600/2 = Rs 64,800/-
  3. Actual rent paid = 3,000 * 12 = Rs 36,000/- and 10% of salary is = 0.10 * 1,29,600 = 12,960/- Rs. The difference comes to 36,000 – 12, 960 = 23,040/- Rs

The minimum of these is Rs 23,040. So Rs 23,040 of HRA is exempt from tax. The rest, which is 30,000 – 23,040 = Rs 6,960 is taxed.

Other considerations of House Rent Allowance

# If you stay in a house which belongs to your parents and you pay rent to them, then you can claim HRA. However,  the income that your parents earn will need to be shown as salary in their income tax returns.

# Rent receipts need to be produced as proof to your employer to show that you are indeed paying rent and to claim HRA.

# If you own a home and have a home loan on it, you can still avail of the HRA benefits along with the home loan tax benefits. It does not matter where your house is located, both the home loan income tax benefits and the house rent allowance benefits can be availed simultaneously. If your home is in the same city as you are rented in, you can justify why you have chosen to stay on rent and still claim the HRA exemption.

Author: Radhey Sharma

Radhey is a Certified Financial Planner and an expert in the disciplines of insurance, retirement, investments and tax. His hobbies include gardening, traveling and reading self development books. The information contained on this blog is general advice and may or may not be suitable to the reader. Kindly take professional help before you apply what you read.

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12 Comments

  1. Do I have to show rent receipts necessarily to my company to avail HRA ?

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    • Many companies will demand the rent receipts while some may just be ok with the lease and license agreement. It depends on companies to companies.

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  2. GOod one . Please cover the LTC stuff also esp the need to flourish ticket details to claim the allowance etc.

    SMiles
    Aditya

    Post a Reply
    • I think you mean LTA, I will do that Aditya in a future article.

      Post a Reply
  3. Good one this. Very informative. I have never calculated HRA and asume my company does it correctly.

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  4. Hi Radhey,
    I am a bachelor living in a room but I did not receive any receipts for the amount I pay as rent for the owner.
    What shall i do?

    Post a Reply
    • @RaviShankarKota, Ask your HR if a simple letter from you will do. Many organizations are flexible in what they want though they ask for a Leave and License Agreement and rent receipts for each month.
      If it does not fly with your HR there is no option but to seek the receipts from your owner.

      Post a Reply
  5. My current comapany offers Basic=53000, HRA=18000, Allowance=0.

    I have an offer where company is giving Basic=15000, HRA=72000, Other Allowances=8000.

    These two offers are drastically different. I have never seen such a high HRA in my life.

    Question 1. Why does company give such a Big HRA and so less Basic
    Question 2. Does the company get any extra benefits for giving such a high HRA. Is there any benefit to the employee.
    Question 3. If i accept the new offer how do i get tax benefit.

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  6. Obviously high basic is always desirable as many statutory benefits and deductions are tied to it. High basic means higher contribution to epf ( employee provident fund) , employee gratuity and other employee benefits that may be tied to the basic. Like the pension scheme if the company offers that. However by giving such a low basic the company is avoiding the other costs elf, pension, gratuity which is also part of the compensation. There is also a pitfall of high HRA. Say this HRA is offered to you in a metro and a couple of months down the line you are transferred to a non metro your HRA will automatically drop. How ever basic cannot be altered. Pls look into such issues while firming up the offer that you have recieved

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    • Thanks for the feedback, really appreciated.

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  7. Hi,

    My husband is working in mumbai, stays in a rented flat in mumbai. Me and my son live in bangalore in a rented flat.

    We also have a own house in coimbatore where my in-laws live and he’s getting exemption on interest paid for such housing loan.

    Can my husband claim HRA for the rent paid in both the places(Mumbai & Bangalore), also exemption for the interest paid on loan.

    Thanks & Regards,
    Ramya

    Post a Reply

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