How HRA and HRA exemption are calculated
House Rent Allowance has two separate calculations. Government employees receive HRA as a fixed percentage of basic pay based on the classification of their posting city. Every salaried taxpayer, government or private, then computes how much of that HRA is exempt from income tax under Section 10(13A).
Step 1 — HRA entitlement by city class
Central government HRA is 30% of basic pay in X-class cities, 20% in Y-class and 10% in Z-class. These rates apply on basic pay only, not on basic plus DA, and were raised when DA crossed 50%.
Step 2 — Compute the three exemption limits
The Income Tax Act allows the least of three amounts: actual HRA received, rent paid minus 10% of salary, and 50% of salary for metro cities or 40% for non-metros. Salary means basic pay plus dearness allowance that counts for retirement benefits.
Step 3 — Take the lowest figure
The smallest of the three is exempt; the remainder is added to taxable salary. If your rent is less than 10% of salary, the exemption becomes zero regardless of how much HRA you receive.
Step 4 — Check your tax regime
HRA exemption is available only under the old tax regime. Under the new regime you pay lower slab rates but forgo HRA, so compare the total tax in both before opting.