House Rent Allowance (HRA): Exemptions and Taxable Amount
Introduction to House Rent Allowance (HRA)
House Rent Allowance (HRA) is an important component of the salary structure for employees who live in rented accommodations. HRA is provided to employees to help them manage their rent expenses. However, HRA has specific tax exemptions under the Income Tax Act, which can reduce an employee’s tax liability.
Taxation of House Rent Allowance (HRA)
According to Section 10(13A) of the Income Tax Act, HRA is partially exempted from tax, subject to certain conditions. The extent of exemption depends on the amount of rent paid and the employee’s salary. The formula to calculate the exempt portion of HRA is as follows:
- Actual HRA received by the employee,
- Rent paid by the employee in excess of 10% of their salary,
- 50% of the salary if the employee resides in a metro city or 40% if in a non-metro city.
The taxable portion of HRA is calculated as the total HRA received minus the exempt portion, as per the above formula.
Conditions for Claiming HRA Exemption
- Employee Must Pay Rent: To claim HRA exemption, the employee must pay rent for the accommodation. If an employee owns the property they reside in, they are not eligible for HRA exemption.
- Rent Agreement: It is advisable for employees to have a rent agreement to support their claim for HRA exemption. Without a formal rent agreement, employees may face difficulties in justifying the exemption.
- Metro vs. Non-Metro Cities: The tax exemption varies depending on whether the employee lives in a metro city or a non-metro city. For metro cities like Delhi, Mumbai, Chennai, or Kolkata, the HRA exemption is calculated at 50% of the salary. For non-metro cities, it is calculated at 40% of the salary.
Taxable HRA: When No Exemption Is Allowed
In some cases, HRA may become fully taxable:
- Rent Paid Is Less Than 10% of Salary: If the rent paid is less than 10% of the employee’s salary, HRA will be fully taxable.
- Self-Occupied Property: If the employee owns the property they are residing in, HRA will be fully taxable as the exemption is only available when the employee is paying rent for a house.
- No Rent Receipts: Without proper rent receipts or proof of payment, employees cannot claim HRA exemption, and the entire HRA will be taxable.
Calculation of Exempt and Taxable HRA
The following formula is used to calculate the exemption available for HRA:
Exempt HRA = Minimum of:
- Actual HRA received,
- Rent paid minus 10% of the salary,
- 50% of salary (for metro cities) or 40% (for non-metro cities).
The remainder will be taxable.
Example:
Let’s say an employee receives a salary of ₹60,000 per month, and the HRA received is ₹20,000 per month. The rent paid by the employee is ₹15,000 per month, and they live in a non-metro city.
- Salary = ₹60,000
- Actual HRA received = ₹20,000
- Rent paid = ₹15,000
Exemption Calculation:
- 50% of salary (for metro cities) = ₹30,000
- Rent paid minus 10% of salary = ₹15,000 – ₹6,000 = ₹9,000
- Actual HRA received = ₹20,000
Exempt HRA = ₹9,000 (Minimum of the three amounts above)
Taxable HRA = ₹20,000 – ₹9,000 = ₹11,000
In this case, ₹11,000 would be taxable.