Your HRA exemption is the lowest of three amounts. You do not get the full House Rent Allowance tax-free — the Income Tax Act caps it at whichever of these three is smallest.
The three amounts
- The actual HRA you receive from your employer.
- The rent you pay, minus 10% of your basic salary.
- 50% of your basic salary if you live in a metro city, or 40% if you don't.
Work out all three for the year. The smallest number is your exemption. The rest of your HRA is taxable.
A quick example
Say your basic is ₹40,000 a month, you get ₹18,000 HRA, and you pay ₹20,000 rent in a metro.
- Actual HRA: ₹18,000
- Rent minus 10% of basic: ₹20,000 − ₹4,000 = ₹16,000
- 50% of basic: ₹20,000
The lowest is ₹16,000 a month, so that much is exempt. The remaining ₹2,000 of HRA is taxed.
What your rent receipts must show
To claim, you submit rent receipts to your employer. Each should show your name, the landlord's name, the property address, the amount in figures and words, the period, and the landlord's signature.
The landlord's PAN
If your total rent for the year crosses ₹1,00,000, you must report the landlord's PAN. Without it, the employer may deny the exemption.
Revenue stamp
For cash rent above ₹5,000, affix a revenue stamp on the receipt and have the landlord sign across it.