How much of house rent allowance is exempt from income tax?

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Print Edition: November 15, 2007

How is the exemption on house rent allowance (HRA) calculated? Can I claim the tax benefits on the housing loan if I am living in a rented house? Also, can one adjust rental income against the interest on a home loan?

-Mukteshwar Prasad, Patna

The HRA you receive from your employer is exempt from tax if you pay house rent. There are three simple calculations to find out how much of the HRA is exempt from tax. The least of these calculations is your exemption limit. Let us illustrate this with an example:


Monthly - Rs 20,000
Annual - Rs 2,40,000


Monthly - Rs 6,500
Annual - Rs 78,000


Monthly - Rs 8,000
Annual - Rs 96,000

The three calculations for HRA exemption:

Option I

Actual HRA received: In this case it is Rs 78,000 

Option II

Rent paid minus 10% of salary

Rs 96,000 - Rs 24,000 = Rs 72,000

Option III

50% of salary (metros) or 40% (others): Rs 1,20,000 (metros), Rs 96,000 (others) 

The second calculation being the least of the three, the individual is eligible for tax exemption of only Rs 72,000. The remaining Rs 6,000 of the HRA received will be clubbed with his annual income and taxed at the rate applicable to him. House rent receipts have to be submitted to the employer to claim the exemption.

If you claim tax deduction for the interest paid on a housing loan, you are not eligible for HRA exemption. Interest up to Rs 1.5 lakh in a year paid on a housing loan is deductible from the taxable income of the individual under Section 24(b) of the Income Tax Act. But this income tax deduction is available only if the property is selfoccupied. However, if the house is let out the income received as rent can be adjusted against the interest paid on the housing loan.

People who have more than one house have to pay tax on the rental income of the second house even if the house has not been rented out. If the rental value of the house lying vacant is Rs 5,000 a month, the owner will have to show an income of Rs 60,000 from house property in his tax return and pay tax on it. This is the deemed rental income of the house.

However, the rules are different if the second house is in another city. A person living in a rented house can claim the tax exemption available on HRA as well as the deduction of the interest paid on a housing loan if the property is not in the same town where he is based. There is also no deemed rental value if the house is in another city.

In some cases, a person may live in a companyprovided residence while he owns another house in the same city. If this house is lying vacant, he will have to pay tax on the deemed income from the property. However, if it is occupied by his dependents (parents, children, etc), then the tax will not be applicable.

This is an interactive section for investors. Do you have a query regarding your investments? Write to us at letters.moneytoday@intoday.com and we will give a detailed answer.

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