House Rent Allowance (HRA) is an allowance provided by an employer to an employee to meet the expenses of renting a house. It is a component of the salary package of an employee and is usually a percentage of the employee's basic salary.
To claim HRA exemption, the employee needs to provide proof of rent paid through rent receipts or rent agreement with the landlord. The amount of HRA exemption is calculated as the minimum of the following three amounts:
- Actual HRA received
- Rent paid minus 10% of basic salary
- 50% of basic salary for employees living in metro cities and 40% of basic salary for employees living in non-metro cities.
Suppose Mr. A is employed in a company and his basic salary is Rs. 50,000 per month. He lives in Mumbai and pays a rent of Rs. 25,000 per month. His company provides him with an HRA of Rs. 20,000 per month.
To calculate the HRA exemption, we need to follow the steps mentioned below:
Actual HRA received (25000*12) = 300000
Rent paid minus 10% of basic salary (20000*12 - 600000*10%) = 180000
50% of basic salary for employees living in metro cities (50000*12)*50% = 300000
The remaining 120000 of the HRA allowance will be taxable as per Mr. A’s income tax slab.