How to Calculate HRA Income Tax Exemption

Almost every salaried class person receives HRA (house rent allowance) as part of the salary package irrespective of whether he is paying rent or not. Besides, after basic pay, HRA constitutes the second most significant component of your CTC (cost-to-company).

From tax planning point of view, I have already mentioned in detail how to claim HRA tax exemption and also further clarified all your doubts regarding claiming both -- HRA tax exemption and home loan interest deduction -- simultaneously. For details, please see 4 Ways of Claiming HRA Tax Exemption Along With Home Loan Interest Deduction.

However, some of you might also be interested in knowing how much of the HRA is actually tax exempt or deducted while computing taxable income, or how to calculate the tax exempt portion of the HRA. In fact, it is better to be aware of some tax basics instead of completely relying on your employer so that you can do some of the basic tax calculations and planning yourself.

According to section 10 (13A) of Income Tax Act, 1961 read with rule 2A of Income Tax Rules, least of following three is exempt from tax:

1. Actual HRA received
2. Rent paid in excess of 10% of salary (Basic + DA)
3. 40% of salary (50% if residing in a metro i.e., New Delhi, Kolkata, Chennai or Mumbai)

Salary for the above purpose means BASIC + DA. However, private sector organizations, usually, doesn’t provide DA to employees.

Let’s take an example. Suppose that you’re residing in Mumbai and paying a rent of Rs 20,000 p.m. and that your salary package comprises the following:

Basic — Rs. 50,000 p.m.
DA — Nil
HRA — Rs. 20,000 p.m. (40% of basic)

Now, the exempted amount of HRA will be least of the following three figures:

1. HRA received i.e., Rs. 20,000
2. Rent above 10% of basic i.e., Rs. 15,000 (Rs. 20,000 – Rs. 5,000)
3. 50% of basic i.e., Rs. 25,000

The least of the three is Rs 15,000; therefore, in this particular case you’re entitled for HRA tax exemption of Rs. 15,000 p.m. (per month) out of total HRA received of Rs. 20,000 p.m. In other words, net taxable portion of the HRA works out to be Rs 60,000 i.e., Rs 2,40,000 (HRA received) minus Rs 1,80,000 (HRA tax exempt).

If you've any other questions regarding HRA, please read "How to Claim HRA Tax Exemption - Tips & FAQs".

Also see:

1. HRA Tax Calculator

2. 4 Ways of Claiming HRA plus House Loan Tax Benefits