House Rent Allowance (HRA) is one of the most significant tax exemptions available to salaried employees in India. If you live in rented accommodation, understanding the exact calculation formula can save you tens of thousands of rupees in income tax.

The HRA Exemption Formula

The exempt portion of HRA is the minimum of these three amounts:

  • Actual HRA received from your employer during the year
  • Rent paid minus 10% of Basic Salary (annual)
  • 50% of Basic Salary if in a metro city (Delhi, Mumbai, Kolkata, Chennai) OR 40% for non-metro cities

Step-by-Step Calculation Example

Assume: Basic Salary = \u20b96,00,000/year | HRA received = \u20b93,00,000/year | Annual rent paid = \u20b92,40,000 | City = Mumbai (metro)

  • Actual HRA received = \u20b93,00,000
  • Rent \u2212 10% of Basic = \u20b92,40,000 \u2212 \u20b960,000 = \u20b91,80,000
  • 50% of Basic = \u20b93,00,000

HRA Exempt = \u20b91,80,000 (minimum of the three). Taxable HRA = \u20b93,00,000 \u2212 \u20b91,80,000 = \u20b91,20,000.

Documents Required

  • Rent receipts for each month
  • Rent agreement (recommended for higher claims)
  • Landlord PAN if annual rent exceeds \u20b91,00,000

Common Mistakes to Avoid

  • Paying rent to a spouse-the Income Tax department does not allow this
  • Claiming HRA while also claiming home loan deduction on the same property you are living in
  • Not declaring HRA to employer and then claiming it at ITR time without supporting receipts

HRA Under New Tax Regime

HRA exemption is not available under the new tax regime. This is one of the biggest reasons many taxpayers with high rent find the old regime more beneficial.

Use the SaveTaxNow Calculator to see how HRA exemption affects your total tax under both regimes.