House Rent Allowance

Q. What is House Rent Allowance (HRA)?

Ans.: If a taxpayer is a salaried person and living in a rented house, then certain sum of money is paid to him every month by his employer as Allowance against accommodation. The very purpose of paying this allowance is to meet the expense of rent on accommodation in which the taxpayer is living. This sum of money is referred to as House Rent Allowance.

As per the provisions of the Income-tax act, some portion of the HRA is exempt from tax.

Q. How much House Rent Allowance (HRA) is exempt from tax?

Ans.: Out of total HRA received by the taxpayer, minimum of the following is exempt from tax-

1. Actual HRA received,
2. Rent paid minus 10% of basic salary,
3. 50% of basic salary where the taxpayer is living in Metro city and 40% of basic salary where the taxpayer is living in other cities.

Balance HRA is taxable and added to his salary income for the financial year.

Let us take an easy example-

• Mr. Prashant lives in a rented premises in Chennai. He pays Rs. 12,500/- per month as rent for the house. His basic salary is Rs. 40,000/- per month whereas he also receives house rent allowance (HRA) of Rs. 15,000/- per month. How much HRA exemption could be claimed by Mr. Prashant in his Income-tax return for F.Y. 2018-19. 

  HRA exempt from tax will be minimum of the following-

1. Actual HRA received i.e. Rs. 15,000/- p.m.
2. Rent paid minus 10% of basic salary i.e. Rs. 12,500- Rs. 4,000 = Rs. 8,500/-
3. 50% of basic salary since Mr. Prashant is living in Chennai (a metro city) i.e. Rs. 20,000/-

Hence, as the minimum amount is Rs. 8,500/-. Mr. Prashant could claim Rs. 8,500/- as HRA exemption in his Income-tax Return. However, the balance HRA amount of Rs. 6,500/- is taxable and added to his salary.