An employer includes certain allowance in the remuneration of the employee termed as House Rent Allowance or HRA. This allowance is used by the employee to meet the rental expenses for his/ her accommodation.
The reason why HRA has gained so much importance in the recent years is because according to the Income Tax Act, Section 10 (13A) and Rule 2A of the Income tax rules, the employee is exempted from paying tax on HRA.
There are several procedures in place to check if the employee is actually staying on a rented apartment not owned by him. The exemption of HRA will be the minimum of the below 3 options:
Actual house rent allowance received from the employer
Actual house rent paid – 10% of the basic salary
IF one lives in a metro, then 50% of basic salary
Else 40% of the basic salary
For e.g. if ones basic salary is INR 200000, HRA received= 50000, rent paid = INR 60000
Then HRA exemption is minimum of (50000, 40000, and 100000)
Hence the exemption that one can obtain is INR 40000