The amount of House Rent allowance, which is to be treated as ‘exempt’ from income tax has to be taken as the least of the following amounts:-

1. Actual HRA Received, or
2. Rent paid in excess of 10 of salary, or
3. 50% of salary if the employee is in Chennai/Mumbai/Kolkatta/Delhi and 40% of salary if the employee is in any other place.

For purpose of deduction of tax, the payment of rent by the employees drawing more than Rs 3,000 as HRA should be verified through rent receipts, though no rent receipt is required for drawal of HRA.

On Suggestions from a number of my friends about the values being not clear enough to understand and correlate with their salary. Please note few important points:

1) HRA exemption is based upon the city you are residing – living in a Metro City (Delhi, Chennai, Kolkata, Mumbai) lets individual avail exemption up to 50% (of Basic), whereas for other cities maximum exemption is up to 40% (of Basic).

2) Exemption is determined after calculating minimum of ‘3’ values used for exemption – those ‘3’ values are calculated as mentioned below:

a. Suppose Basic Salary per month (for an individual living in Delhi) is 15,000, then HRA paid to employee as per scale is 7,500.

i.      HRA Paid to Employee per annum – 90,000

ii.     Rent Paid by the Employee         -  8,000 * 12 = 96,000

1.       10% of Basic                                       -  18,000

iii.      RENT PAID – 10% basic                  -  78,000

iv.      40%/50% of Basic                             -  90,000 ( Delhi –  Metro city so 50%)

From the values in (ii), (iii) and (iv) – (iii) i.e., 78,000 being the lowest is considered for exemption. So, even if the individual mentioned above is liable to get exemption up to 90,000 but from the HRA exemption rules, he can only avail benefit on 78,000.

On the other hand if the rent paid by the same employee were to be (9,000 * 12) (60% of Basic) – exemption on total (90,000) can be availed.

NOTE: For a metro city like Delhi, if rent paid is atleast 60% of Basic, then exemption can be availed on complete HRA amount which is part of salary(which normally is no more than 50% of Basic).

Illustration. – A Government servant stationed in Delhi and drawing Pay Rs. 9,000 p.m., DA Rs. 3,400., CCA Rs 300 p.m and HRA Rs 2,700 p.m. is residing in a house paying a monthly rent of Rs 3,200. Calculate the amount of HRA which can be exempted from Income Tax.

Answer.

(a) HRA received @ Rs 2,700 p.m.                             Rs. 32,400 p.a.

(b) Rent paid in excess of 10% of salary, (i.e.,Rs. 3,200 – 900) X 12                                      Rs. 27,600

(c) 50% of salary, i.e., Rs. 9,000 X 50/100 X 12           Rs. 54,000

Rs. 27,600, which is the least of the three amount, will be exempt.

Important Points about House Rent Allowance

1. No portion of HRA will be exempt from tax –

(i)  If the assessee lives in his own house or in a house for which no rent is paid by him,
(ii) If the actual rent paid by him is equal to or less than 10% of his pay.

1. In other cases, exemption of HRA received is permissible to the extent admissible by applying the above mentioned formula.