Answer Posted / pardeep

According to section 10 (13A) of Income Tax Act, 1961 read
with rule 2A of Income Tax Rules, least of following three
is exempt from tax:

1. Actual HRA received
2. Rent paid in excess of 10% of salary (Basic + DA)
3. 40% of salary (50% if residing in a metro i.e., New
Delhi, Kolkata, Chennai or Mumbai)

Salary for the above purpose means BASIC + DA. However,
private sector organizations, usually, doesn’t provide DA
to employees.
Let’s take an example. Suppose that you’re residing in
Mumbai and paying a rent of Rs 11500p.m. and that your
salary package comprises the following:

Basic — Rs. 50,000 p.m.
DA — Nil
HRA — Rs. 20,000 p.m. (40% of basic)

Now, the exempted amount of HRA will be least of the
following three figures:

1. HRA received i.e., Rs. 12000
2. Rent above 10% of basic i.e., Rs. 6500 (Rs. 11500– Rs.
5,000)
3. 50% of basic i.e., Rs. 25,000

The least of the three is Rs 6500; therefore, in this
particular case you’re entitled for HRA tax exemption of
Rs. 6500 p.m. (per month) out of total HRA received of Rs.
12000 p.m. In other words, net taxable portion of the HRA
works out to be Rs 162000 i.e., Rs 240000(HRA received)
minus Rs 78000(HRA tax exempt).

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