House Rent Allowance Tax Benefit

Posted In India - By NitiN Kumar Jain On Tuesday, January 11th, 2011 With 5 Comments






Pin It


You all are aware of the tax exemptions available under section VI A and section C too.

You all must also be aware of the tax exemptions available on the salary components for the service industry employees like HRA exemption, LTA, Conveyance and Medical allowances exemption.

Let us quickly go through the way we can get our HRA salary component exempted from the income tax.

An employee is eligible to claim tax exemption for House Rent Allowance under Section 10 (13A) of the Income Tax Act, 1961, provided:

  • The house rent allowance is a part of the employee’s salary, and
  • The employee has actually paid the house rent.

If both of the above are true then the employee is entitled to claim tax exemption from the least of the following:

  • House rent allowance received
  • Actual rent paid less 10% of basic salary i.e. Rent paid – 10% of basic salary
  • 40% (in case of non-metro cities) or 50% (in case of metro cities) of basic salary i.e. Bangalore 40% / Delhi, Mumbai and Chennai 50%

Let’s see an example to understand it:

I am a resident of Bangalore (non-metro) and my monthly salary is:

    • Basic = Rs 12000
    • HRA  = Rs 5000
    • And I paid a rent / month = Rs 5000

This is how the exemption will be calculated:

    • Actual HRA = Rs 5000
    • Actual rent paid – 10% of basic = 5000 – 10% of  12000 = 5000 – 1200 = Rs 3800
    • 40% of Basic since I live in a non metro city = 40% of 12000 = Rs 4800

Rs 3800 is least of the above three amounts and hence I would get Rs 3800 HRA exemption.

Let’s see another example:

I am a resident of Delhi (metro city) and my monthly salary is:

    • Basic = Rs 10000
    • HRA  = Rs 5000
    • And I paid a rent / month = Rs 6000

This is how the exemption will be calculated:

    • Actual HRA = Rs 5000
    • Actual rent paid – 10% of basic = 6000 – 10% of  10000 = 5000 – 1000 = Rs 5000
    • 50% of Basic since I live in a metro city = 50% of 10000 = Rs 5000

Rs 5000 is least of the above three amounts and hence I would get Rs 5000 HRA exemption.

As you saw in the second example that I got complete HRA exemption whereas in the previous example I could only save Rs 3800 from my HRA where I could have saved my complete HRA component. What really matters is the salary structure of the company we work with.

The second structure is a bit employee friendly where you can save income tax on complete house rent allowance portion.

Hope this helps you not only in choosing the right company but the right salary structure too.

You can also refer to the online calculator for HRA exemption.