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House Rent Allowance (HRA) is the allowance provided by an employer to their employee as a compensation for house rental expenses paid by the employee. It forms part of the salary paid by the employer to their employee.

The exemption on HRA is calculated as per 2A of the Income Tax Rules. As per Rule 2A, the least of the following is exempted from salary under Section 10(13A) and does not form part of the taxable income.

1. Actual HRA received from the employer
2. For those living in metro cities: 50% of (Basic salary + Dearness allowance)
3. For those living in non-metro cities: 40% of (Basic salary + Dearness allowance)
4. Actual rent paid minus 10% of (Basic salary + Dearness allowance)

If the payment of rental expenses is more than ₹ 1,00,000/- annually, then it is mandatory for the employee to provide the PAN number of the landlord while filing income tax returns.

Let us understand the HRA component that would be exempt from income tax through an example

Mr X, employed in Mumbai, has taken up an accommodation on rent for which he pays a monthly rent of ₹ 25,000/-. He receives a Basic Salary of ₹ 45,000/- monthly along with DA of ₹ 7,000/- monthly which forms a part of the salary. He also receives HRA of ₹ 1 lakh from his employer during the year.

Hence, ₹ 1,00,000/- would be exempt from salary under Section 10(13A).

Also, if the employee is paying rental expenses but does not receive HRA allowance as a part of salary from the employer or if the person is paying rental expenses but does not have salary income, the benefit of paying rental expenses can still be claimed under Section 80GG of the Income Tax Act, 1961.