For most employees, House Rent Allowance (HRA) is a part of their salary structure. Although it is a part of your salary, HRA, unlike basic salary, is not fully taxable. Subject to certain conditions, a part of HRA is exempted under Section 10 (13A) of the Income-tax Act, 1961.
The amount of HRA exemption is deductible from the total income before arriving at a taxable income. This helps an employee to save tax. But do keep in mind that the HRA received from your employer is fully taxable if an employee is living in his own house or if he does not pay any rent.
Who can avail HRA?
This tax benefit is available only to the salaried individuals who have the HRA component as part of his salary structure and is staying in a rented accommodation. Self-employed professionals cannot avail the deduction.
How much is exempted?
The exemption for HRA benefit is the minimum of:
i) Actual HRA received
ii) 50% of salary (Basic + DA) if living in metro cities, or 40% for non-metro cities; and
iii) Excess of rent paid annually over 10% of annual salary (Basic + DA)