What is House Rent Allowance: HRA Exemption, Tax Deduction, Rules & Regulations

House Rent Allowance or HRA in short, is a common component of many salary packages which is allowed as a deduction under the Income Tax Act 1961. However, not all of it is exempt from tax. It is crucial to understand certain calculations to determine how much of the HRA can be claimed as a tax exemption under Section 10(13A) of the Income Tax Act. 

In this article, we will learn in detail about HRA and how to calculate the exempt HRA.

What is HRA?

HRA is a special allowance specifically granted by the employer to the employee towards payment of rent for the accommodation of the employee. The HRA received is taxable and is considered a part of the salary. But the HRA is not fully taxable i.e., a part or entire HRA is exempt from income tax under the old tax regime. The HRA granted is exempt u/s 10(13A) to the extent of least of the following: 

Note: Salary here means Basic Salary, Dearness Allowance if in terms of the agreement, and Commission as a fixed percentage of turnover. 

It is important to understand that the HRA exemption is available only under the Old Tax Regime. Hence, a taxpayer opting for the New Tax Regime will not be allowed to avail the exemption, making the entire component taxable. 

House Rent Allowance Exemption

House Rent Allowance (HRA) is a part of your salary that your employer gives to help you pay for rent.

• Not all the HRA you received is always exempt from income tax. HRA is a part of your salary income and therefore, it is initially considered as your taxable income.
• However, you can claim a tax exemption either – partially or wholly under Section 10(13A) of the Income Tax Act. This is popularly known as HRA exemption. 
• If you live in your own property(not living in rentals), this allowance is fully taxable.

Please note that the tax exemption of House Rent Allowance (HRA) is not available in case you choose the new tax regime. 

Who can Claim HRA Tax Benefits?

It is usually perceived that only salaried class can enjoy the tax benefits related to HRA. But any individual can avail tax benefits related to HRA. 

• Exemption is allowed under section 10(13A) for salaried employees who receive HRA.  
• HRA calculated under this section is not included in salary of the taxpayer.

Conditions for Claiming HRA Exemption u/s 10(13A)

To claim HRA exemption under Section 10(13A), you must meet these conditions:

• You must be a salaried employee.
• You should live in a rented house.
• HRA must be included in your salary (CTC).
• You need to submit valid rent receipts and proof of rent payment.

The HRA exemption calculation will depend on various factors like salary, rent paid, HRA received by the employee and city of residence of employee.

How to Calculate HRA Exemption?

As per Rule 2A the lowest of the following amounts can be claimed as HRA exemption u/s 10(13A):

• Actual HRA received 
• Metro Cities**:  50% of [basic salary + DA + Commission*]
• Non-Metro Cities: 40% of [basic salary + DA + Commission*]
• Actual rent paid (-) 10% of [basic salary + DA + Commission*]

*Commission means commission as a fixed percentage of turnover.

**Metro Cities refer to Delhi, Mumbai, Chennai and Kolkata.

HRA Exemption Example

Mr. Anwar, employed in New Delhi, has taken up an accommodation on rent for which he pays Rs.10,000 per month during the Financial Year (FY) 2024-25. He receives a basic salary of Rs.25,000 monthly and DA of Rs.2,000, which forms a part of the salary. He also gets an HRA of Rs. 1 lakh from his employer during the year.

Let us understand the HRA component that would be exempt from income tax during FY 2024-25. As per the given data, calculate the following:

HRA exemption would be the lowest of the following:

The entire rent amount of Rs.1,20,000 paid by Mr Anwar is not directly exempt. It involves calculations, and the lowest of the three calculated amounts will be exempt from income tax. Also as Mr. Anwar stays in New Delhi which is a metro city, 50% of Basic and DA will be considered for calculation purposes and not 40%. 

As the HRA received is Rs. 1 lakhs the entire HRA component will not be exempt for Mr. Anwar. The exemption will be the least i.e., Rs. 87,600. The remaining HRA component will be taxed at applicable slab rates. This is only if Mr. Anwar opts for the Old Tax Regime. 

This exemption will not to available to Mr. Anwar under the New Tax Regime implying that the entire HRA of Rs. 1 lakhs will be taxed at applicable slab rates.  

HRA Calculator

Try out our free HRA calculator to determine your HRA exemption. This calculator shows you on what part of your HRA you have to pay taxes – i.e. how much of your HRA is taxable and exempt from tax.

Documents Required to Claim HRA

The following are the important documents required to claim HRA. There is no necessity to submit all the supporting documents along with the income tax return. But for submission of proofs to the employer, and to respond to the department in case of any notices, the following documentation is recommended.

• Rent Receipts
• Rental Agreement
• Form 12BB
• Bank payment proof for rent
• Salary slip where HRA is incorporated
• PAN of landlord - if the rent exceeds Rs.1 Lakh per annum. Else, you may lose out on the HRA exemption.

Landlords without a PAN must sign a self declaration stating he does not have a PAN, as per circular No. 8/2013 dated 10 October 2013.

Can I Claim HRA and Deduction on Home Loan Interest?

Yes, you may claim both HRA exemption and home loan interest deduction.

There can be two situations where you are living in a rented house while owning a house. 

Rented House and the Own House are Located in the Same City

Here, you need to justify the claim of deduction with valid reasons, i.e., why you are not living in your own house. One case may be that the office location is very far from the house you own. This way, you can claim both HRA and Home loan benefits subject to the fulfilment of applicable conditions.

How to Claim HRA When Living With Parents?

Let’s understand this with an example.

Samiksha works in an MNC in Bangalore. Though her company provides her with HRA, she lives with her parents in their house and not in rented accommodation. How can she make use of this allowance?

Samiksha can pay rent to her parents and claim the allowance provided. She has to enter into a rental agreement with her parents and transfer money to them every month. Also, Samiksha’s parents need to report the rent paid by their daughter as their income in their income tax return. They can save tax on the family income if their other income is below the basic exemption limit or taxable at a lower tax slab.

Things that are necessary in this arrangement

• Rental agreement 
• Transfer of rent amount, preferably via bank transfer
• Reporting of rental income by their parents by filing an income tax return.

Also read about: 
Basic Salary 
UAN Login 
Last Date to File ITR  
Section 115BAC of Income Tax Act  
Income Tax Deductions List 
How to e verify ITR  
Annual Information Statement (AIS) 
Section 80D  
Home Loan Tax Benefit 
Leave Travel Allowance