House rent allowance granted by an employer to his employee is tax exempted to the extent provided under section 10 (13A) of income tax act 1961. Employees in India, receive house rent allowance from their employer every month as a part of their terms and conditions of employment.
As per the Income Tax Act provision, HRA is partly exempted if certain terms and conditions met by the employee. Today In this article, we will discuss how to get HRA exemption and how to calculate taxable HRA as per Income Tax Act, 1961.
Employers provide HRA benefits to employees to meet the cost of a rented house at the employer’s work location.
An employee can claim an exemption on his house rent allowance only if he stays in rented accommodation during the financial year.
If an employee stays in his own home or in a house for which he does not have to pay any rent then the House Rent Allowance (HRA) exemption under this section is not available.
This means the entire HRA received from the employer will be taxable in the hand of the employee. So to get entitled to the exemption, the employee needs to pay rent for the house.
Exemption for HRA is divided based on the city where employees live. Income tax act specifies two types of cities for the calculation of exemption;
- Metro Cities i.e. Mumbai, Kolkata, Chennai, and Delhi
- Non-Metro Cities – All other cities except Mumbai, Kolkata, Chennai, and Mumbai
House rent allowance exemption calculation in case of metro cities
If you have taken a rented accommodation in a metro city i.e. Mumbai, Kolkata, Chennai, and Delhi then your house rent allowance (HRA) will be exempted to the extent of following;
- Actual HRA received from the employer
- Actual house rent paid minus 10% of your salary due for the relevant period
- 50% of salary due for the relevant period
So the least of the above three will be deducted from your HRA you receive and the balance will be taxable.
HRA Exemption in case of Non-Metro cities
If you are not living in non-metro cities i.e. cities other than Chennai, Mumbai, Kolkata, and Delhi then your house rent allowance exemption calculation will differ. In this case, the least of followings will be exempted in the case of non-metro cities;
- Actual House rent allowance received from the employer
- Actual rent paid minus 10% of your salary due for the relevant period
- 40% of your salary due for the relevant period
For both cases, Salary means basic salary plus dearness allowance if provided in the terms of employment, plus commission as a percentage of turnover.
Salary for the calculation of house rent allowance exemption is taken on due basis. If you have received any advance salary then that amount will not be included in HRA exemption calculation.
Relevant Period for the purpose of HRA exemption calculation means the period during which the said accommodation was occupied by the employee during the previous year
As it’s very clear from the provision that house rent allowance is available only for the relevant period, the employee can claim exemption only for the period for which he or she has occupied the rented house. If during the financial year he or she has not occupied a rented accommodation then they will not be eligible for HRA exemption.