How HRA Exemption Is Calculated in India

Summary

House Rent Allowance (HRA) is a salary component that can be partially or fully exempt from income tax if you live in rented accommodation. The exemption is the minimum of three amounts: actual HRA received, rent paid minus 10% of salary, or 50%/40% of salary depending on the city. HRA exemption is only available under the old tax regime.

How it works

The three-part formula

The HRA exemption under Section 10(13A) read with Rule 2A is the least of:

1. Actual HRA received from your employer
2. Rent paid minus 10% of salary (Basic + DA)
3. 50% of salary if you live in a metro city (Delhi, Mumbai, Kolkata, Chennai), or 40% of salary if non-metro

“Salary” for HRA purposes means Basic salary + Dearness Allowance (DA). Commission received on a fixed percentage of turnover is also included.

Eligibility conditions

• You must be a salaried employee receiving HRA as part of your salary
• You must actually pay rent for accommodation you occupy
• HRA is only exempt under the old tax regime
• If rent exceeds Rs 1,00,000 per year, you must provide the landlord’s PAN
• Rent paid to a spouse does not qualify for exemption

Worked example

Basic: Rs 50,000/month, HRA: Rs 20,000/month, Rent: Rs 22,000/month, Metro city

Monthly calculation:

1. Actual HRA: Rs 20,000
2. Rent - 10% of Basic: Rs 22,000 - Rs 5,000 = Rs 17,000
3. 50% of Basic (metro): Rs 25,000
4. Exempt HRA: min(20,000, 17,000, 25,000) = Rs 17,000/month
5. Taxable HRA: Rs 20,000 - Rs 17,000 = Rs 3,000/month

Annual tax saving (at 30% slab): Rs 17,000 x 12 x 30% = Rs 61,200

Non-metro example: Basic Rs 40,000, HRA Rs 16,000, Rent Rs 15,000

1. Actual HRA: Rs 16,000
2. Rent - 10%: Rs 15,000 - Rs 4,000 = Rs 11,000
3. 40% of Basic: Rs 16,000
4. Exempt: min(16,000, 11,000, 16,000) = Rs 11,000/month

Inputs explained

• Basic salary — monthly basic pay (plus DA if applicable)
• HRA received — the HRA component in your salary
• Rent paid — actual monthly rent
• City type — metro (Delhi, Mumbai, Kolkata, Chennai) or non-metro

Outputs explained

• Exempt HRA — the portion of HRA that is tax-free
• Taxable HRA — the portion that is added to taxable income
• Annual tax saving — how much income tax you save from the exemption
• Optimal rent — the rent level that maximizes your HRA exemption

Assumptions & limitations

• HRA exemption is not available under the new tax regime. If you switch to the new regime, your entire HRA becomes taxable.
• If you own a home in the same city, you can still claim HRA if you rent and live elsewhere, though this may attract scrutiny.
• Self-employed individuals cannot claim HRA but can claim rent deduction under Section 80GG (up to Rs 5,000/month or 25% of total income).
• The calculation is done on a monthly basis if salary or rent changes during the year.