House Rent Allowance or HRA exemption calculation

House rent allowance or HRA is considered to be one of the main component of salary provided by the employer in connection with rent of the accommodation taken by employee at the place of service.

Based on the city’s living condition, house rent allowance is fixed before sending offer letters to employees. House rent allowance is taxable under the head “income from salary” in the hands of employee to the extent it is not exempted.

This means, to calculate taxable HRA, assessee has to first calculate the exempted part and then deduct that part from the actual House Rent Allowance received.

Below in this article, we will be discussing all relevant house rent allowance rules and regulations applicable to an employee.

HRA exemption provisions are specified in section 10(13A) of income tax act 1961 read with rule 2A. As per the section 10(13A) provisions, House rent allowance is exempted up to the extent of the minimum of the following three amounts;

• If the residential accommodation occupied by the employee is situated in Mumbai, Kolkata, Delhi or Chennai then calculate 50% of the salary, for the relevant period. If the residential accommodation occupied by the employee is in a place other than Mumbai, Delhi, Kolkata and Chennai then instead of considering 50%, assessee should calculate 40% of the salary, for the relevant period.
• Actual house rent allowance or HRA received from employer in respect of the relevant period.
• Actual Rent paid minus 10% of the salary for the relevant period.

Please remember, least of the above three will be exempted and balance amount will be taxable as a part of employee’s gross salary.

Conditions for House Rent Allowance Exemption

Employee need to fulfill following conditions to get eligible for HRA exemption;

• must be staying in a rented accommodation, and
• Employee is in receipt of house rent allowance from employer, and
• paid rent to the landlord for staying in a rented accommodation.

All these conditions must be satisfied before claiming HRA exemption. Please note, to take tax benefits, submission of rent receipt is mandatory for HRA exemption. You need to submit it to employer along with rent agreement towards the end of the previous year. If you failed to submit rent receipt, employer will not give you HRA exemption. In such case, you need to claim HRA exemption while filing income tax return with government.

Meaning of Salary For Calculating HRA exemption

Salary for the purpose of calculating HRA includes dearness allowance if the terms of employment so provides but excludes all other allowances and perquisites and commission if received as a fixed percentage of turnover achieved by employee.

This means salary for the purpose of calculating HRA exemption limit = Basic salary + dearness allowance forming part of salary as per the terms of the employment + commission if received as a fixed percentage of turnover achieved by employee.

If employee did not incur house rent or stays in his or her own accommodation then HRA exemption under section 10(13A) will not be available. This means, in such type of cases, no exemption will be available under section 10(13A) due to which entire HRA received by the employee from the employer will be taxable as part of gross salary.

What is relevant period

While calculating House Rent Allowance or HRA as specified above, assessee has to consider it for the relevant period during which the said accommodation was occupied by the assessee during the financial year.

Salary in this case should be considered on due basis for the relevant period during which the rented accommodation is occupied by the employee in the previous year. This means, salary for the other period in which assessee has not occupied the accommodation will not be considered even though its received and taxed during the previous year.

Format for HRA exemption calculation

When employee accommodation is in Kolkata, Chennai, Delhi and Mumbai (Metro cities):-

When employee Accommodation is in cities other than Mumbai, Chennai, Kolkata and Delhi (Non metro cities):-

Example to know how House Rent Allowance exemption is calculated in salary

Assume for a moment that Mr X is working in a private limited company in Chennai. His basic salary per month is Rs 5000 and Rs 1000 as Dearness allowance is Rs 1000 per month, out of which 40% is forming part of salary.

He is also getting house rent allowance @ Rs 3000 per month and pays Rs 2000 per month as rent.

Before calculating actual house rent allowance exemption, we need to calculate salary for the purpose of HRA exemption.

Salary for HRA calculation = 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;

1. Actual HRA received – Rs 3000*12 = Rs 36000
2. Actual rent paid by employer to employee minus 10% of salary – (2000*12) minus (10% of Rs 64800) = Rs 17520
3. 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).

In step 3 of above calculation, we have considered 50% of salary because the assessee is in Chennai. If the city is other than metro cities, then you should calculate 40% of salary instead of 50%. Remaining steps will be same irrespective of cities.

Summary of exemption of house rent allowance under section 10(13A)

If the house is situated in Delhi, Chennai, Mumbai and Kolkata (known as metro cities), then minimum of the following 3 limits is exempted from tax as house rent allowance:

If the house is situated in a city other than the metro cities, then minimum of the following 3 limits is exempted from tax as house rent allowance;

Note: Meaning of salary for above calculation is considered on due basis as basic salary plus dearness allowance to the extent the terms of employment so provide plus commission if fixed percentage of turnover

Frequently Asked Questions on House Rent Allowance or HRA

To claim HRA, whom should i submit documents?

House rent allowance will be allowed only when you pay rent to the landlord and submit following documents to your employer at the end of the year;

• Rent receipt – generally employers are asking for the first month and last month rent receipt
• Rent agreement – To be notarized
• If rent paid for the year is more than Rs 1, 00,000 then PAN details of the landlord or house owner is mandatory.

If employee does not produce landlord’s PAN card details to employer then he or she will not be eligible for HRA exemption.

What to do when house owner or landlord does have PAN

If house owner does not have PAN, then employee should obtain a declaration the landlord stating that he does not have PAN or have applied for it.

There is no specific format specified for such declaration. Employee can obtain it in plain paper. Following things can be mentioned in the declaration to be on safer side;

• House owner’s full name and communication address
• Rented accommodation address
• Whether house owner does not have PAN or Applied for a PAN. If applied then acknowledgement number can be obtained from your house owner.
• Clearly state that the flat or house has been provided to you on rent and house owner is not liable to tax or if any reason for which he has not applied for a PAN

Providing this declaration will full fill the requirement of income tax law and you will be out of trouble in future.

In absence of such declaration, employer will be forced to deduct TDS from your HRA.

Is rent paid to parents allowed as HRA exemption?

Yes, if you are paying rent to your parents then HRA exemption will be allowed only if they are the owner of the property. In this case, you need to submit above documents to your employer at the end of the year.