What is HRA?

Definition

House rent allowance is a salary component paid towards accommodation costs, and it carries an income tax exemption for employees who actually pay rent.

How it works

HRA is ordinary salary for most purposes but is treated specially under income tax. The exemption is the least of three amounts, so it depends on the salary, the rent actually paid and the city, and an employee who pays no rent gets no exemption regardless of how the salary is structured.

What it means in India

Under section 10(13A) of the Income Tax Act 1961 and the associated rule, the exemption is the least of: the actual HRA received; rent paid in excess of ten percent of salary; and fifty percent of salary for accommodation in Delhi, Mumbai, Kolkata or Chennai, or forty percent elsewhere. Salary for this purpose means basic plus dearness allowance forming part of retirement benefits. The exemption is available under the old tax regime; employees who opt for the concessional regime under section 115BAC forgo it, so the value of an HRA-heavy structure depends on which regime the employee is on.

What people get wrong

• Assuming the whole HRA is exempt. It is the least of three amounts, and for many employees the binding limit is rent paid minus ten percent of salary.
• Building a structure around HRA for an employee who has opted for the concessional tax regime, where the exemption is not available.
• Not collecting rent receipts and, where the annual rent crosses the prescribed threshold, the landlord permanent account number. Without the documentation the exemption is disallowed at assessment even though the rent was genuinely paid.

Terms this one depends on

More on pay and salary structure

Where this shows up in practice

Almost everything on this page ends up as a line on a payslip or a figure in a register. Shiftelio keeps attendance, leave, salary structure and the statutory deductions in one place, so the number in the letter and the number in the payslip come from the same record.