HRA or house rent allowance is a stipend or a grant that is paid along with your salary. HRA figures as a component just like any other component when the organization draws up the salary structure of a typical employee. HRA is usually handed over to the employee by his or her employee to compensate for the costs incurred for renting a place to stay. HRA being a salary composite is always paid along with the total or cumulative remuneration and never paid independently.

Though it is not binding on the part of the employer to pay house rent allowance (as there is no statute or law that makes it obligatory), almost all private and public corporate organizations and establishments disburse HRA. Employees in all state run and large private corporations are entitled to receive HRAs irrespective of whether they stay in a rented accommodation or not. HRA is paid on a monthly basis and is usually equivalent to 50% of your basic salary if you’re staying in the Class-I or Tier-I cities and 40% for other areas.

The actual amount you ultimately receive might vary from organization to organization. In case you’re staying in company quarters or accommodation, then you may not be eligible to receive HRA. On the other hand, a percentage will be deducted from your gross salary to pay for free accommodation.

Conditions under which you can get HRA and also claim tax exemptions

HRA is a taxable component but you can claim tax exemptions under section 13 (A) of Income Tax Act on the following grounds:-

  • Salary (Amount)
  • Living in rental apartment or flat
  • Amount of HRA received
  • Location of the residence
  • Your wife or your parents should not be owner of the house

The calculation procedure for HRA

To work out the tentative HRA amount that can you claim to be exempted from your tax liabilities, you have to take into consideration three composite valuations:-

  • The actual or exact rent you receive from your organization or employer
  • The definite amount you pay for your accommodation for which an amount equal to 10% of your salary is taken away or withheld
  • 50% or half of your base salary or earnings if you stay in a metropolis and 40% for non-metropolitan areas

Whichever of the above three figures or valuations is the lowest or least is considered for exemption as far as your HRA is concerned. If your current salary structure is not commensurate or appropriate for availing of tax benefits on HRA, you can talk with your employer for modifying or restructuring the same.

The above proposition can be explained in a better manner through an illustration.

For instance, you receive a basic salary amounting to 45,000 INR (monthly). If you take a flat or apartment on rent in Mumbai for say 22,500 INR then you’re entitled to receive exemption equivalent to 50% of your base salary. You receive an HRA of 25,000 INR. Therefore the figures that will be taken into account to work out the actual exemption amount are:-

  • HRA received which is 25,000
  • 50% of base salary which is 22,500 INR
  • The extra rent paid over and above 10% of salary which is 22,500-4,500 = 18,000 INR

Therefore, the actual amount that you’ll be able to stake a claim for exemption will be 25,000-18,000 = 7,000 INR which incidentally is the lowest amongst all the above valuations.