How to Calculate House Rent Allowance ?

Note on House Rent Allowance 

Employees  receive a house rent allowance (HRA) from their employers as a part of the salary , in accordance with the terms and conditions of employment. HRA is given to meet the cost of a rented house taken by the employee. 

The Income Tax Act allows for deduction in respect of the HRA paid to employees. The exemption on HRA is covered under Section 10(13A) of the Income Tax Act and Rule 2A of the Income Tax Rules. It is to be noted that the entire HRA is not deductible. HRA is an allowance and is subject to income tax.

Employee can claim exemption on his HRA under the Income Tax Act if he stays in a rented house and is in receipt of HRA from his employer. In order to claim the deduction, an employee must actually pay rent for the house which he occupies. The rented premises must not be owned by him. 

In case one stays in an own house, nothing is deductible and the entire amount of HRA received is subject to tax. 

As long as the rented house is not owned by the assessee, the exemption of HRA will be available up to the the minimum of the following three options:

1.      1.   Actual house rent allowance received from your employer

2.       2. Actual house rent paid by you minus 10% of your basic salary

3.       3. 50% of your basic salary if you live in a metro or 40% of your basic salary if you live in a non-metro -

This minimum of above is allowed as income tax exemption on house rent allowance.

Salary here means basic salary which includes dearness allowance if the terms of employment provide for it, and commission based on a fixed percentage of turnover achieved by the employee. The deduction will be available only for the period during which the rented house is occupied by the employee and not for any period after that.