Section 10(13A) of the Income Tax Act, 1961 provides an exemption for the House Rent Allowance (HRA) received by an employee to meet rental expenses. This exemption is subject to certain limits and conditions.
Conditions for HRA Exemption:
- The employee must be a salaried individualreceiving HRA as part of their salary.
- The exemption is available only if the employee pays rentfor residential accommodation.
- The exempted amount is the least of the following three:
- Actual HRA receivedfrom the employer.
- Rent paid minus 10% of salary(Basic + DA).
- 50% of salary(for metro cities: Mumbai, Delhi, Kolkata, Chennai) or 40% of salary (for non-metro cities).
Example of HRA Calculation:
Let’s assume:
- Basic Salary + DA:₹50,000 per month
- HRA Received:₹20,000 per month
- Rent Paid:₹18,000 per month (living in Mumbai, a metro city)
Step 1: Calculate the three limits
- Actual HRA received= ₹20,000
- Rent paid – 10% of salary
= ₹18,000 – (10% of ₹50,000)
= ₹18,000 – ₹5,000 = ₹13,000 - 50% of salary(since Mumbai is a metro city)
= 50% of ₹50,000 = ₹25,000
Step 2: Determine the exempted HRA (least of the three)
- Least of (₹20,000, ₹13,000, ₹25,000) = ₹13,000
Step 3: Taxable HRA
- Total HRA received (annual):₹20,000 × 12 = ₹2,40,000
- Exempt HRA (annual):₹13,000 × 12 = ₹1,56,000
- Taxable HRA:₹2,40,000 – ₹1,56,000 = ₹84,000
Key Points:
- If an employee does not pay rent, the entire HRA becomes taxable.
- Rent receiptsor a rent agreement may be required as proof for claiming exemption.
- If the rent exceeds ₹1 lakh per annum, the employee must provide the landlord’s PAN (if applicable).
