What is HRA in salary?

HRA full form is House Rent Allowance. It is a component of an employee's salary paid to them by their employer towards the rent of their house. HRA exemption is a tax exemption that salaried employees in India can claim on the House Rent Allowance (HRA) that they receive from their employers.

HRA is one of the most common tax deductions that salaried employees can claim. The HRA exemption is designed to help employees who are paying rent to live in a high-cost city and to encourage employees to relocate to cities with a shortage of skilled workers.

The amount of HRA exemption that an employee can claim depends on the following factors:

• The city in which the employee lives
• The employee's basic salary and dearness allowance (DA)
• The actual rent paid by the employee

Benefits of HRA Exemption

The HRA exemption offers a number of benefits to employees, including:
Reduced tax liability: The HRA exemption can help employees to reduce their tax liability significantly.

Increased disposable income: The HRA exemption can help employees to increase their disposable income, which can be used to meet other financial obligations or to save for the future.

Flexibility: Employees can choose to live in any city they want, without having to worry about the high cost of rent.

Mobility: The HRA exemption can encourage employees to relocate to cities where there is a shortage of skilled workers.

HRA comes under which section?

Employees can claim a tax exemption on it under Section 10(13A) of the Income Tax Act, 1961. To claim HRA exemption, employees must meet the following conditions:

• They must be occupying the house on rent
• The house must be used for the employee's sole or principal residence
• The employee must not own any other residential property at the place where they are currently residing

How much HRA can be claimed?

The entire HRA amount paid to an employee cannot be claimed for deduction. Also note, that the rent you actually pay is likely to differ from the HRA you receive.

Additionally, HRA calculation also takes into consideration if you live in a metro city (Delhi, Kolkata, Mumbai, or Chennai) or in a non-metro city; 50% of your basic salary if you live in a metro city else 40% of your basic salary.

Hence, the HRA claim is the lowest of:

Annual HRA received = monthly HRA * 12
Actual rent paid - 10% of basic pay =  monthly rent paid * 12 - 10% of (monthly basic pay*12)
40% or 50% of your annual basic pay

Employees are required to produce proofs like lease agreements or receipts to claim HRA. To avoid the fuss of last-minute proof, try our rent receipt generator free tool.

How to calculate HRA in salary?

As aforementioned, the HRA calculation depends on the basic salary of your CTC and your city of residence. We have simplified it for you with our HRA exemption calculator. 

Example:
Let’s assume the following details for Mr. Ajay:

• Basic salary: ₹30,000 per month
• DA (Dearness Allowance): ₹5,000 per month
• Actual HRA received: ₹15,000 per month
• Actual rent paid: ₹12,000 per month
• City: Non-metro

Calculating the exempt portion of HRA:

Actual HRA received: ₹15,000

40% of salary (basic + DA): 40% of (₹30,000 + ₹5,000) = ₹14,000
Rent paid minus 10% of salary (basic + DA): ₹12,000 - 10% of (₹30,000 + ₹5,000) = ₹12,000 - ₹3,500 = ₹8,500

The minimum of the above three amounts is ₹1,02,000 i.e ( 8,500*12). Therefore, ₹1,02,000 is the exempt portion of HRA, and the remaining 78,000 (₹15,000 - ₹8,500=6,500) is taxable.