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Meaning of HRA with simple calculation

Updated on June 19, 2013

Understanding HRA with an example

Salaried person is always thinking about saving tax at the end of the year. House Rent Allowance (HRA) is one of the way to save tax. People are not much aware about House Rent Allowance. Here is the helpful information which will be useful while filing your income tax.

In India, Income tax act 1961 includes HRA as a special allowance for employee.
Majority of the people in metro cities like Mumbai lives in rented house and pay rent. In this regard HRA is very useful exemption to claim tax benefit.

Employee should ponder below mentioned point while claiming HRA exemption.

  • Employee’s salary structure must include HRA.It means that HRA must be a component of his pay package.
  • Person must be paying actual rent; it means he must be living in rented house

For HRA, exemption available is lowest from following,

  1. Amount actually received for HRA.
  2. Actual rent paid less 10% of salary.
  3. Percentage applicable in metro city is higher,

For Delhi, Mumbai, Kolkata, Chennai – 50% of employee salary
For other region - 40% of employee salary

Following simple example will to understand HRA calculation for Mr. Rajesh.

Mr. Rajesh is staying in Mumbai and working as an account in a multinational company.
His month earning and salary structure is as follows,

Basic earnings - 15,000 per month

HRA - 6,000 per month

Actual rent paid- 6,500 per month

Following calculation is applied to Mr. Rajesh.

Actual rent paid -10% of basic earning

6,500 - 10% of 15,000

6,500 – 1,500


50% of basic earning as Mr. Rajesh is living in metro city – 50% of 15,000 = 7,500

So Mr. Rajesh can claim exemption of Rs 5,000.

Reader will find this article useful, feel free to ask question.


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