What is HRA?

HRA stands for House Rent Allowance. It is an allowance paid by an employer as part of an employee's salary to meet the cost of rented accommodation. HRA is partly taxable and partly exempt, depending on where the employee lives and how much rent is paid. The exemption is available under Section 10(13A) of the Income Tax Act, 1961 and is calculated using Rule 2A.

The exemption is the least of the following three amounts:

• Actual HRA received from the employer.
• 50% of basic salary for employees in metro cities (Delhi, Mumbai, Chennai, Kolkata) or 40% for employees in non-metro cities.
• Actual rent paid minus 10% of basic salary.

If an employee does not pay rent, the entire HRA is taxable. The metro cities for the 50% rule are Delhi, Mumbai, Chennai and Kolkata. For all other cities, the 40% rule applies. Rent receipts are usually required by the employer. If the annual rent exceeds ₹1 lakh, the landlord's PAN must be provided; otherwise, the employer may not allow the full exemption when calculating TDS.

Worked example

An employee in Mumbai has a basic salary of ₹50,000, receives HRA of ₹25,000 and pays rent of ₹20,000.

| Condition | Calculation | Amount | |---|---|---| | Actual HRA | Given | ₹25,000 | | 50% of basic | 50% of ₹50,000 | ₹25,000 | | Rent paid − 10% of basic | ₹20,000 − ₹5,000 | ₹15,000 |

The exemption is the least of the three, which is ₹15,000. The remaining HRA of ₹10,000 is added to taxable salary.

Related reading

Use the HRA exemption calculator or read the TDS on salary guide.