FinTech Glossary

How HRA Exemption Is Calculated

House Rent Allowance (HRA) is a component of an employee’s salary paid by an employer to help cover rental housing expenses. In India, HRA is partially or fully exempt from income tax under the Income Tax Act, subject to specific conditions.

Tax Perspective

HRA is commonly included in the salary structure of salaried employees who live in rented accommodation.

Its primary purpose is to reduce the tax burden on employees by offering tax relief on rent paid for residential housing.

The tax treatment of HRA depends on factors such as salary, rent paid, and the city of residence.

Who Is Eligible for HRA Exemption

HRA tax exemption is available to salaried individuals who meet the following conditions:

1. Receive HRA as part of their salary
2. Live in a rented house
3. Pay rent for residential accommodation

Employees who live in their own house are not eligible for the HRA tax exemption, even if HRA is part of their salary.

How HRA Exemption Is Calculated

The HRA exemption is calculated as the lowest of the following three amounts:

1. Actual HRA received
2. Rent paid minus 10 percent of the basic salary
3. 50 percent of basic salary for metro cities, or 40 percent for non-metro cities

Only the remaining portion of HRA, if any, is taxable.