Every salaried taxpayer needs to be aware of various exemptions that are available under the Income Tax Act, 1961 to reduce the tax outgo effectively. If you are a salaried individual, you need to give a declaration to your employer stating the income tax exemptions and deductions that you would claim. Based on your declaration TDS (tax deducted at source) of the salary will be calculated and deducted. TDS so deducted from the salary will reflect in Form 16 for the financial year, which you need to obtain from your employer. You can also see the details of TDS in Form 26AS. House Rent Allowance (HRA) is one of the exemptions available for salaried individuals under the Income Tax Act, 1961 that can help save tax effectively. 

What is House Rent Allowance (HRA)? What is the HRA taxability?

House Rent Allowance (HRA) is a component of your salary which is non-taxable provided all the conditions are fulfilled. It is an allowance provided by your employer to compensate for your house rent expenses. If you are residing in a rented house, you can claim HRA allowances partially or wholly (based on the applicability) to reduce the tax outgo. However, it is important to note that you cannot claim HRA tax exemption in case you opt for a new tax regime.

According to Rule 2A of the Income Tax Rules, HRA tax exemption is permissible under Section 10(13A) of the Income Tax Act, 1961. 

How do you calculate HRA tax exemption?

The amount of house rent allowance eligible for tax exemption is the least of the following for the financial year:

  • Actual house rent allowance (HRA) received
  • 50% of (basic salary + dearness allowance), If you are living in metro cities
  • 40% of (basic salary + dearness allowance), if you are living in non-metro cities
  • The actual amount of rent paid minus 10% of (basic salary + dearness allowance)

Let’s understand this with an example. Let’s say you are employed in Mumbai and staying in a rented accommodation for which you pay a monthly rent of INR 20,000. Let’s assume your basic salary is INR 45,000 a month and dearness allowance is INR 4,000. Let’s say the house rent allowance component included in your annual salary is INR 2,00,000. Now, let’s understand the calculation of the HRA component eligible for tax exemption for the financial year

As per the rules, HRA eligible for tax exemption for the financial year is the least of the following:

  • Actual house rent allowance (HRA) received – INR 2,00,000
  • 50% of (basic salary + dearness allowance), If you are living in metro cities – INR 2,94,000 -50% of 12*(45,000+4,000)]
  • 40% of (basic salary + dearness allowance), if you are living in non-metro cities – Not applicable as you are not residing in a non-metro city
  • Actual amount of rent paid minus 10% of (basic salary + dearness allowance) – INR 1,81,200 [(12*20,000) – {10% of 12*(45,000+4,000)}] 

That means, the amount of HRA tax exemption eligible for the financial year is INR 1,81,200.  Instead of calculating manually, you can calculate the HRA tax exemption amount using the HRA calculator. 

What is an HRA calculator?

HRA calculator is a simple and easy-to-use online tool that helps you know the amount of HRA that is eligible for tax exemption. You can simply input a few basic details to calculate HRA tax exemption using this HRA calculator online. All you need to do is input your basic salary, dearness allowance, HRA received, total rent paid, and resident city type (metro/non-metro. That’s it, the HRA calculator instantly calculates the amount of HRA exempted and the amount of HRA taxable. 

Make use of valuable tools like the HRA calculator to simplify the process of taxation. Plan your taxes effectively, stay tax compliant and be a responsible citizen.