Exemption on HRA - House Rent Allowance

Exemption on HRA - House Rent Allowance

-Dr. Lalit Kumar Setia

In the class, the participants usually ask how much rent we can pay for getting full exemption on House Rent Allowance? If a person is paying Rent equivalent to the HRA amount, then how many portions of HRA will be taxable? Should I pay more rent than HRA for getting a full exemption on HRA? What does Income Tax Act tell regarding exemption on House Rent Allowance? Without getting confused, let us understand how to compute the amount of exemption in the received amount of House Rent Allowance.

Who can claim exemption on House Rent Allowance – HRA?

The person who are doing service or in other words, the employees get an amount for meeting their cost of rent as an allowance that is known as House Rent Allowance. Only those salaried persons who are residing in a rented house can get an exemption on House Rent Allowance. The salaried person who is not residing in a rented house, cannot get exemption on House Rent Allowance and their whole amount of HRA is taxable.

From the Financial year 2020-21, the Income Tax Department has introduced New Tax Regime. It is worth mentioning here that the persons who are opting for New Tax Regime, are not allowed to claim exemption on House Rent Allowance – HRA. Such persons even if paying rent, are not eligible to get exemption of HRA and their full HRA amount is taxable.

Need not to say, the HRA amount should be included first in the amount of Gross Salary then only the exemption is claimed on HRA.

How to compute Salaries after exemption of HRA?

There are two steps to compute the Salaries after exemption of HRA:

Step 1 – Take the amount of Salaries including HRA

Step 2 – Subtract the amount of exempted HRA

How much amount should be subtracted/How much HRA is exempt?

There are three figures which are compared and at least of the figures is exempt.

a. Amount of HRA received and included in the Gross Amount of Salaries

b. Rent Paid – 10% of Salary*

c. 40% of Salary* or 50% of Salary*

*Here Salary means Basic Salary and Dearness Allowance.

It is found in the classroom inquiries that most of the employees usually takes a percentage of Basic Salary than Basic Salary + Dearness Allowance. That is wrong.

How much amount a person can pay as Rent to claim full exemption on House Rent Allowance?

It is known that the amount of HRA is exempt at least of the three figures, one is HRA received, second is Rent Paid – 10% of Salary, and third 40% or 50% of the Salary.

The full exemption can be up to the amount of HRA received. In most of cases, Rent Paid – 10% of Salary is the amount of exemption. If we took it as a parameter to decide the amount of full exemption on HRA, then the following amount can be paid as rent:

HRA Received = Rent Paid – 10% of Salary

Then, Rent Paid = HRA Received + 10% of Salary

Let us take an example: 

Suppose Basic Salary is Rs. 50000, DA is Rs. 8000 and HRA is 10% i.e. Rs. 5000. The person is paying Rs. 6000 as rent.

Then the exempt HRA will be at least of the following:  

a. Rs. 5000 HRA Received   

b. Rent Paid Rs. 6000 – 10% of (Basic Salary and DA)

= Rs. 6000 – 10% of (50000 + 8000)

= Rs. 6000 – Rs. 5800 = Rs. 200.

c. 40% of Salary

= 40% of (50000 + 8000)

= 50% of 58000

= Rs. 29000.

a. Rs. 5000, b. Rs. 200, c. Rs. 29000.

It means Rs. 200 will be exempt and the remaining will be taxable.

How much rent can be paid in this case to get the full exemption?

Rent Paid for full exemption = HRA Received + 10% of Salary

= Rs. 5000 + 10% of (Rs. 50000 + 8000)

= Rs. 5000 + Rs. 5800

=Rs. 10800. 

*Copyright © 2021 Dr. Lalit Kumar. All rights reserved.

This article is written by Dr. Lalit Kumar Setia; a renowned author and trainer. He completed his Doctorate in Commerce from Kurukshetra University Kurukshetra and MBA in Information Technology from GJU, Hisar. He also wrote two books, 15 research papers, and organized more than 200 Training Courses during his working period since 2006 in Haryana Institute of Public Administration, Gurugram. The article was published on 31^st August 2021 and last updated on 4^th September 2021. The writer can be contacted on lalitkumarsetia@gmail.com 

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