House rent allowance. More commonly known as HRA. If you had paid attention during the lesson on Income Tax in school, you might have had a better idea of what it is. But worry not, we’re here to help. In simple terms, house rent allowance is a component of salary that is paid to employees by an employer for their accommodation costs in the city, which also lets them get an HRA tax exemption on their income tax. House rent allowance is why you should pay more attention to your salary break-up when you get that offer letter from your company. And also why you should hold on to those house rent receipts.
House Rent Allowance is calculated based on the employee’s salary and the city they reside in. And a lot of it is up to the employer as well. But while this might make it sound complicated, the HRA calculation formula is pretty simple.
Basically, the tax exemption that one can claim on their House Rent Allowance is the lowest amount of these three:
Not clear yet? Let’s use an example.
Say there’s a guy called Kirat Vohli, who works for a company called ‘Choyal Rallengers’ in Bangalore. The company gives him a salary of ₹1,00,000, which is broken up like this.
Kirat’s Salary Component |
Amount (₹) |
Basic |
Rs.50,000/- |
HRA |
Rs.20,000/- |
Conveyance |
Rs.8,000/- |
Medical Allowance |
Rs.12,000/- |
Special Allowance |
Rs.10,000/- |
Total Salary |
Rs.1,00,000/- |
Now, though Kirat Vohli’s HRA allowance is 20 grand, he pays a rent of only 18k. So which one of these will be his HRA tax exemption?
Yup, the HRA tax exemption for Mr. Vohli will be ₹13,000. So, wasn’t that calculation as smooth as a cover drive by a cricketer whose name rhymes with Kirat Vohli?
HRA tax exemption is that amount that is deducted from an employee’s taxable income at the end of the year. It’s a cushion to the blow that is the skyrocketing rental rates in urban India. Now, you can do this only if you’re living in a rented apartment. People who have their own house cannot benefit from HRA calculation for income tax under Section 80GG. But then, half their salaries don’t go to their landlords as soon as it is credited to their bank accounts.
As we explained earlier, house rent allowance calculation is calculated on the basis of the HRA calculation formula, and the tax-exempt portion of the HRA is the minimum of the following elements:
Note here that ‘salary’ means basic salary, dearness allowance (DA) and commission received on the basis of percentage of turnover. So don’t get ahead of yourself and make the HRA calculation based on your entire CTC.
Some of the most important HRA claim rules are as follows:
Good news. You can claim income tax exemption on both HRA and home loans. If you are living in a rented place and paying a home loan on some other property, you can claim tax benefits for both of them. Even if they are located in the same city.
So the least of these three amounts is your tax exemption on HRA
The remaining amount is taxed as per the tax slab you’re in.
Yes, you can but for that, you need to show proof of the required documents for HRA deduction. For example, if your parents are the owners and you pay house rent to them, you can claim the tax benefit if you can provide the house rent receipts.
You can claim HRA exemption on home loan interest under section 24 and principal repayment under section 80C, when you pay rent in one city and own a house in another.