HRA Calculation - Income Tax Act 1961 - Section 10 ( 13A)- Rule 2a

Step 1: What is defined as Salary?


Salary = Basic Pay + Dearness Allowance (D.A.)
DA – Govt Employees (% Basic)

Private Sector – No D.A.

Step 2: Eligibility Criteria

Three conditions must be fulfilled:

A.HRA Component as part of package
B.Staying in rented accommodation
C.Rent is more that 10% of salary { Basic 40,000/ Rent>4,000}

Step 3: HRA Exemption in Metro & Non-Metro

Metro [Delhi, Mumbai, Chennai or Kolkata] = 50% of Basic Pay
Non- Metro = 40% of Basic Pay

Step 4: HRA Tax Exemption Calculation

A.What’s your HRA allowance amount (salary slip)?

Ex:
Basic – Rs 40,000
HRA – Rs 20,000
Flexi – Rs 30,000

Ans: Rs 20,000

B.What’s your HRA Exemption amount based on location {metro/non-metro}?

Ex:
Location - Bangalore
Basic – Rs 40,000
HRA – Rs 20,000
Flexi – Rs 30,000

Ans: Bangalore [non-metro]= 40% x Basic = Rs 16,000

C.How much rent have you paid in excess of 10% of your basic pay?

Ex:
Rent Paid – Rs 15,000
Basic – Rs 40,000
HRA – Rs 20,000
Flexi – Rs 30,000

Ans:
10% of Basic = 4,000
Rent paid in excess of 10% of Basic = 15,000 – 4,000=11,000

D. Least of three rule- Income Tax Act, 1961

Least of following three is exempt from tax:

1. Actual HRA received
2. Rent paid in excess of 10% of salary (Basic + DA)
3. 40% of salary in Non-metro (50% if residing in a metro i.e., New Delhi, Kolkata, Chennai or Mumbai)

E. Example

Rent Paid – Rs 15,000
Location – Bangalore
Basic – Rs 40,000
HRA – Rs 20,000
Flexi – Rs 30,000

1.Actual HRA received
[Rs 20,000]

2. Rent paid in excess of 10% of salary (Basic + DA)
[15,000-(10%x 40,000)] =11,000

3. 40% of salary in Non-metro (50% if residing in a metro i.e., New Delhi, Kolkata, Chennai or Mumbai)
[Bangalore= 40% x 40,000 = 16,000]

Least of three = Rs 11,000

Yearly HRA exempted from Tax calculation = 11,000 x 12 = Rs 132,000
Taxable = 20000(HRA) x 12 - 132000 = Rs 108,000

Step 4: Proof

Rent is < Rs 3,000: No Proof Required

Rent is > Rs 3,000: Rent Receipts Required


Income Tax Act, 1961, Rule 2a