What HRA exemption means
House Rent Allowance is a part of many salary packages. If you live in rented accommodation, a portion of your HRA is exempt from tax under Section 10(13A) of the Income Tax Act. Only the exempt portion escapes tax; whatever HRA is left over is added to your taxable salary.
The exemption is not simply the rent you pay or the HRA you receive — it is the least of three amounts, which is what trips people up.
The exemption formula
Your exempt HRA is the minimum of:
- Actual HRA received from your employer
- Rent paid − 10% of basic salary (basic + dearness allowance)
- 50% of basic salary if you live in a metro, or 40% if you live elsewhere
Whichever of these three is smallest is your exempt amount. Everything is usually computed on a monthly basis and then annualised.
Worked example
Assume monthly figures: basic + DA = ₹50,000, HRA received = ₹20,000, rent paid = ₹18,000, living in a metro city.
- Actual HRA received = ₹20,000
- Rent − 10% of basic = 18,000 − 5,000 = ₹13,000
- 50% of basic (metro) = ₹25,000
The least of the three is ₹13,000 per month, so the annual exemption is ₹13,000 × 12 = ₹1,56,000. The taxable part of HRA is (20,000 − 13,000) × 12 = ₹84,000 a year.
Notice that even though you receive ₹20,000 HRA, only ₹13,000 is exempt — because the rent-minus-10%-of-basic figure is the binding limit. Paying more rent (or having a higher basic) would change the result.
How to maximise your HRA exemption
- A higher rent raises limit 2, up to the point where one of the other two limits binds.
- A salary structure with a higher basic raises limits 2 and 3 — though basic also affects PF and gratuity.
- Living in a metro unlocks the 50% limit instead of 40%.
Remember the exemption only helps if you are in the Old regime; under the New regime HRA is fully taxable, so weigh the HRA benefit when choosing your regime with the income tax calculator.