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Tax exemption calculation for House Rent Allowance (HRA)

HRA is a component included in the salary of the employees and it provides tax breaks to the individuals for the amount paid by them for accommodations every year. However not the whole amount received in HRA is exempt nor the whole amount paid as rent. Below are the parameters for calculating HRA tax exempted portion.

Least of the below is treated as tax exempt:

1. Actual HRA received
2. 40% of Basic Salary for Non-Metro cities and 50% of Basic Salary for Metro cities
3. Rent paid over 10% of Basic Salary

Example: Ram (employed in Bangalore) is being paid a Basic salary of Rs.50,000 and HRA of Rs.15,000. He pays a rent of Rs.18,000 on a monthly basis. Lets calculate the taxable portion of HRA.

1. Rs. 18,000
2. 40% of Rs.50,000 = Rs.20,000
3. Rs.18,000 – (Rs.50,000 *10%) = Rs. 13,000

HRA Taxable = HRA Received – Least of the above

i.e., = Rs. 15,000 – Rs. 13,000 = Rs. 2,000

Note: All the monthly figures will have to be converted to yearly for calculations.