What is HRA and how is it calculated?
House Rent Allowance can save your employees real tax — if it's calculated right. Here's how HRA works and how the exemption is determined.
House Rent Allowance (HRA) is one of the most valuable parts of a salary — it helps employees who pay rent reduce their tax. But its exemption isn’t the full amount; it’s calculated by a specific rule. Here’s how it works.
What is HRA?
HRA is an allowance paid by an employer to help cover an employee’s rented accommodation. It’s a standard component of most Indian salary structures, usually set at 40–50% of basic pay.
How much HRA is tax-exempt?
Only part of HRA is exempt from tax. The exempt amount is the lowest of these three:
- Actual HRA received from the employer.
- Rent paid minus 10% of basic salary.
- 50% of basic (for metro cities) or 40% of basic (for non-metro cities).
Whatever is smallest becomes the exemption; the rest is taxable.
A quick example
Say an employee in a metro city has:
- Basic pay: ₹30,000/month
- HRA received: ₹15,000/month
- Rent paid: ₹18,000/month
The three figures are:
- Actual HRA = ₹15,000
- Rent − 10% of basic = ₹18,000 − ₹3,000 = ₹15,000
- 50% of basic = ₹15,000
Here all three happen to match, so ₹15,000 is exempt. Change any input and the exemption changes.
What employees need to claim it
To claim HRA exemption, employees typically provide rent receipts, and for annual rent above ₹1,00,000, the landlord’s PAN.
Getting HRA right in payroll
HRA depends on basic pay, city, and rent — get any wrong and the tax is off. Staff Payroll lets you define HRA as part of each salary structure so it’s calculated consistently every month, and reflected correctly on every payslip.