Is HRA Taxable? What is the HRA Calculation Formula?

One of the common components of a salary receipt is HRA (House Rent Allowance). This allowance is provided to help the employees living in rented housing cover their rental expenses.

However, as individuals are required to pay taxes on their income, it is essential to know “is HRA taxable”?

For this reason, we have created this post to help you understand tax laws related to HRA and the formula for calculating it.

Is HRA Taxable?

According to Section 10(13A) of the Income Tax Act, the HRA received by an employee is included in his total income:

• If he lives in a residential accommodation owned by him.
• If he lives in a rental accommodation but does not pay rental expenses for the accommodation occupied by him.

As the HRA is considered a part of the total income for the above-mentioned cases, it remains taxable for salaried individuals who live in their own houses or do not incur any expenditure such as rent.

As per this section, if you satisfy the provisions of Clause (13A) of Section 10 of the Income Tax Act, you can claim the HRA exemption for the rent you pay for occupying an accommodation.

Note: The HRA tax exemption is only claimable by those who follow the old tax regime.

What is the HRA Calculation Formula?

The amount of exemption you can claim depends on the HRA formula mentioned in Income Tax Rule 2A. This formula determines the HRA exemption limit; the lowest amount is considered.

1. Actual amount of HRA received by the employee in the relevant year
2. Actual amount paid for rent (-) 10% of the salary
3. One-half (or 50%) of the salary received in the relevant year (for a person living in Mumbai, Delhi, Kolkata or Chennai).
4. Two-fifths (or 40%) of the salary received in the relevant year (for a person living anywhere except the above locations).

Let us look at an example to know how to calculate the HRA exemption limit.

Suppose Rahul has a job in Gujarat and lives in rented accommodation. His basic monthly salary is ₹45,000 per month. He receives an additional amount of ₹10,000 as the house rent allowance and pays ₹20,000 rent for his place of residence.

Now, the calculation of the HRA exemption limit for Rahul will be as follows:

Since the first calculation gives the lowest amount (₹1,20,000), Rahul will be allowed to deduct ₹1,20,000 from his taxable income when filing his ITR.

Conditions to Claim HRA Exemption

• You must live in a residential accommodation not owned by you
• You must pay rent each month.
• You must receive the house rent allowance from your employer.

Note: If you are self-employed or if your employer does not provide HRA, you will not be eligible to claim HRA exemption. However, Section 80GG of the Income Tax Act, 1961 offers tax deduction for the rent paid.

Wrapping Up

Salaried employees living in rented accommodation know the major effects of rent on their income and savings. While there is no option to save yourself from this expenditure, you can use helpful tools to promote savings.

Thanks to the tax deductions and exemptions provided under the Income Tax Act, you can reduce your tax liabilities and protect your income from being exhausted due to day-to-day expenses.

PNB MetLife offers a range of life insurance plans that offer substantial tax benefits and a strong financial security.

Our life insurance plans, like the term insurance plans, can help lower your taxable income by allowing you to claim deductions of up to ₹1,50,000 every year. They also provide valuable financial protection for you and your loved ones.