How to take maximum tax advantage of House Rent Allowance (HRA)?

House Rent Allowance (HRA) is provided by an employer to his employee to meet the rental cost of the residential house of the employee. In addition to basic salary, other allowances, and perks, HRA is a very common allowance forming part of the salary package of many employees. Under the Income Tax Act, 1961, Section 10(13A) deals with tax implications of House Rent Allowance(HRA). With some careful planning of the salary structure, we can take maximum tax benefits from this section so that it’s a win-win situation for both the employer and the employee.

A. Tax Advantage on HRA for those staying in places other than 4 Metros (Delhi, Mumbai, Kolkata, Chennai)

To take maximum tax benefit of HRA, the basic salary should be structured to be double of Actual Rent Paid and HRA should be 80% of Actual Rent Paid. An illustration is given below:

Under Section 10(13A) of the Income Tax Act, least of the following is exempt from tax:

1. Rent paid – 10% of Salary (Basic + DA + Commission as a % of turnover)

2. 40% of Salary (Basic + DA + Commission as a % of turnover)

3. Actual House Rent Allowance

So if a person is paying Rs. 10,000 p.m. as rent, his basic salary should be kept at Rs. 20,000 p.m. and HRA at Rs. 8,000 p.m. Then least of the following shall be exempt from tax

1. 10,000 – 2,000 = Rs. 8,000

2. 40% of 20,000 = Rs. 8,000

3. 80% of 10,000 = Rs. 8,000

Thus the person shall get the entire Rs. 8,000 p.m. of Actual HRA as fully exempt from tax.

B. Tax Advantage on HRA for those staying in one of the 4 Metros (Delhi, Mumbai, Kolkata, Chennai)

With simple calculations, it can be derived that for persons staying in one of the 4 Metros, Basic Salary should be kept at 166.67% of Actual Rent Paid and HRA should be kept at 83.33% of Actual Rent Paid.

Under Section 10(13A) of the Income Tax Act, least of the following is exempt from tax, if the rented house is in one of the four metro cities:

1. Rent paid – 10% of Salary (Basic + DA + Commission as a % of turnover)

2. 50% of Salary (Basic + DA + Commission as a % of turnover)

3. Actual House Rent Allowance

So if a person is paying Rs. 10,000 p.m. as rent, his basic salary should be kept at Rs. 16,667 p.m. and HRA at Rs. 8,333 p.m. Then least of the following shall be exempt from tax

1. 10,000 – 1,667 = Rs. 8,333

2. 50% of 16,667 = Rs. 8,333

3. 83.33% of 10,000 = Rs. 8,333

Thus the person shall get the entire Rs. 8,333 p.m. of Actual HRA as fully exempt from tax.