House Rent Allowance (HRA)

How is HRA Exemption Calculated?

To determine the amount of HRA exempt from tax, the following three amounts are compared, and the lowest is allowed as a tax deduction:

1. Actual HRA received from the employer

2. 50% of basic salary + dearness allowance (DA) for those living in metro cities (40% for non-metros)

3. Rent paid minus 10% of basic salary + DA

Example

Let us say an employee in Mumbai earns a basic salary of ₹45,000 and a DA of ₹7,000 per month and receives ₹1 lakh in HRA annually. Their annual rent is ₹3 lakh.

• Actual HRA received: ₹1 lakh

• 50% of salary + DA: 50% of ₹6,24,000 = ₹3.12 lakh

• Rent paid minus 10% of salary + DA: ₹3 lakh – ₹62,400 = ₹2.37 lakh

The exempt amount is the lowest of the three, which in this case is ₹1 lakh. The rest of the HRA, if any, is added to taxable income.

Key Requirements to Claim HRA

• Must be a salaried individual living in rented accommodation

• Must submit rent receipts and rental agreement to the employer

• If annual rent exceeds ₹1 lakh, the landlord’s PAN must be provided

Benefits of HRA

• Tax Savings: Reduces taxable income and increases net salary

• Flexible: Adjusts according to rent, salary structure, and city of residence

• Supports Renters: Especially useful in cities with high living costs

Challenges and Limitations

• Not Available Under the New Tax Regime: If you opt for the new regime under Section 115BAC, HRA exemption cannot be claimed unless allowed through future amendments

• Requires Documentation: Missing rent receipts or landlord details can lead to disqualification

• Only for Renters: Those living in self-owned homes are not eligible

Conclusion

HRA remains a powerful tax-saving tool for salaried employees under the old tax regime. In 2025, as rental costs continue to rise in urban areas, making full use of this exemption can ease your tax burden significantly. Just ensure your documentation is in order, and always choose the tax regime that best aligns with your overall financial goals.