What is the meaning of the house rent allowance

What is House Rent Allowance (HRA)?

A specific amount of money is given to a taxpayer each month by his employer as reimbursement for housing costs if he is a salaried individual renting a home. The exact reason this allowance is being paid is to cover the cost of the taxpayer's rent on the place where they are now residing. The term "Home Rent Allowance" refers to this amount of money.

A portion of the HRA is tax-exempt under the rules of the Income-tax Act.

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

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

1. Actual HRA received,
2. Rent paid minus 10% of basic salary,
3. 50% of the basic salary where the taxpayer is living in a metro city and 40% of the 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 on 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 a 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. 2020-21? 

  HRA exemption from tax will be a 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 the basic salary since Mr Prashant is living in Chennai (a metro city) i.e. Rs. 20,000/-

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