Claiming House Rent Allowance Exemption when staying in a rented house | Rules applicable to employees to claim House Rent Allowance Exemption

October 1st, 2010| News.

Claiming House Rent Allowance Exemption when staying in a rented house | Rules applicable to employees to claim House Rent Allowance Exemption


If the assessee is staying in a rented house and is paying rent, his tax planning should be in the following manner.  The assessee should not claim house rent allowance exemption if he is staying in his own house.

  • Exemption on the interest of loan can be claimed if the house is built / bought with loan.
  • There is limitation for claiming the exemption on interest of loan. Rs.15,000 is the limitation.
  • If both wife and husband are income tax assessees both of them cannot claim house rent allowance.  Only one of them can claim HRA.  Person who gets the maximum benefit should claim the HRA.
  • The rule applicable to the employees is that if they are staying in a rented house and are paying the rent, tax exemption is given by the following whichever is less.

a)      40% of the salary ( 50% in Mumbai, Calcutta, Delhi and Chennai)

b)      Total amount paying by the company as House Rent Allowance.

c)      Amount remaining after subtracting 10th part of the salary from total rent paid.

The above three mentioned will be calculated and exemption is given to whichever is less. Here salary means Basic pay, DA & Commission.  Allowances and perks are not included.

An example

If a person is working in Ahmedabad and his annual salary is Rs.3,00,000.  House Rent Allowance is Rs.50,000.  That means his total salary is Rs.3,50,000.  Rent he is paying is Rs.60,000.

a)      40% of the salary means 40% of Rs.3,00,000 = Rs.1,20,000.

b)      House Rent Allowance = Rs.50,000

c)      Subtracting 10% of the salary from rent being paid annually Rs.60,000 – Rs.30,000 = Rs.30,000

Since option ‘C’ is less he will get an exemption of Rs.30,000.  That means he could not claim the total amount he is paying for the rent, and he at least could not utilize the allowances given by the company.  If he was paying Rs.80,000 as rent, he could claim Rs.50,000 as House Rent Allowance.

Let us see another example – the annual salary of a person staying in Hyderabad is Rs.10 lakhs and House Rent Allowance is 50% of the salary so his total salary is Rs.15 lakhs.  He is paying Rs.6 lakhs as rent.

a)      40% of salary = Rs.4,00,000

b)      House rent Allowance = Rs.5,00,000

c)      Total rent – 10% of the salary = Rs.5,00,000

Fewer amounts of the 3 options are Rs.4,00,000 and so he can claim only Rs.4,00,000.

Another example is a person got transferred to Hyderabad from Mumbai.  He has got his own house in Hyderabad.  His basic salary is Rs.2,40,000 and House Rent Allowance is Rs.1,20,000.  His mother is staying alone in the house.  The house is in the name of his mother.  She has got no other income.  He stayed with his mother and showed Rs.96,000 as rent.  He could claim only Rs.48,000 only.  Since his mother is a senior citizen and has no other income he could show the rent as Rs.1,68,000 and he could avail total exemption on Rs.1,20,000  HRA the company is paying.

Generally the companies pay the House Rent Allowance as 20% to 25% of the basic salary.  No company pays an HRA of 40-50 percent.  In one of the examples 50% allowance is taken just for the sake of explaining.

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