HRA Calculator: Exemption rules to claim House Rent Allowance (HRA) in FY23

Nirmala Sitharaman, the finance minister, made some adjustments to the personal tax structure in the union budget of 2023 to improve its appeal to salaried taxpayers who will be filing income tax returns (ITRs) for the financial year 2023–2024. These adjustments included raising the annual standard deduction, raising the rebate and threshold limit and increasing the basic tax exemption cap. Yet, since the deadline for making tax-saving investments for FY 2022–2023 approaches, it is important to understand how much tax salaried individuals may save on the House Rent Allowance (HRA).

The House Rent Allowance (HRA) is an allowance made by an employer to an employee in exchange for the employee's payment towards house rental expenses. HRA is included in the salary component that the company gives to the employee. Salaried individuals are eligible for HRA exemptions under Section 10 (13A) of the Income Tax Act, according to regulation number 2A of the Income Tax Act. Nevertheless, salaried taxpayers should be aware that the house rent allowance tax exemption is only available under the old tax regime and is not accessible in the event that they have chosen the new tax regime beginning in FY 2020–21. (AY 2021-22).

Archit Gupta, Founder and CEO, Clear said salaried individuals, who live in rented houses, can claim the House Rent Allowance (HRA) to lower their taxes – partially or wholly. This allowance is for expenses related to rented accommodation. If you don’t live in rented accommodation, this allowance is fully taxable. Please note that the tax exemption of house rent allowance is not available in case you choose the new tax regime from FY 2020-21 (AY 2021-22).

By asking him about how is tax exemption from HRA calculated, Archit Gupta said the deduction available is the least of the following amounts:

1) Actual HRA received

2) 50% of [basic salary + DA] for those living in metro cities

3) 40% of [basic salary + DA] for those living in non-metros

4) Actual rent paid should be less than 10% of basic salary + DA

Dr. Suresh Surana, Founder, RSM India said any individual taxpayer in receipt of House rent allowance and making rent payment can claim exemption u/s 10(13A) of the IT Act for lowest of the following:

1) Actual HRA received

2) 50% of the salary in case of employees residing in metropolitan cities (Mumbai, Delhi, Kolkata, Chennai) and 40% of the salary in other cases

3) Rent paid in excess of 10% of the salary

For the purpose of computation of such HRA exemption, salary would constitute the Basic salary, Dearness allowance forming part of retirement and commission as percentage of turnover, he further added.

It is pertinent to note that such amount of house rent allowance is fully taxable if it is received by an employee who is living in his own house or if he does not pay any rent, said Dr. Suresh Surana.

Saurav Ghosh, Co-founder, Jiraaf said “Employers should take on the responsibility of educating their employees about old and new tax regimes so that employees can be aware of maximum eligible deductions claimable and choose the most beneficial tax-saving scheme. By making an advanced declaration of investments, employers can deduct the appropriate amount of tax, and employees can avoid penalties while filing their returns. The new income tax regime in FY 2023-24 has simplified income tax calculation and is particularly beneficial for those earning less than ₹7 lakhs annually.”