The actual HRA deduction that one can avail under Section10 (13A) would be the minimum of the following:
- The actual amount of HRA received.
- 50% of the salary for individuals residing in metros (Delhi, Mumbai, Chennai or Kolkata) and 40% otherwise.
- Rent paid minus 10% of salary (basic component + dearness allowance).
For instance an individual staying in Delhi earns a basic salary of Rs 40,000 per month and rents an apartment for Rs 18,000 per month. He receives an HRA of Rs 25,000 from his employer. His HRA deduction will be the least of the following three figures:
- The actual HRA received: Rs 25,000
- 50% of the salary (since he is staying in a metro city) : Rs 20,000
- Excess of rent paid over 10% salary: Rs 18000 - Rs 4,000 = Rs 14,000
Therefore the tax exemption will be Rs 14,000 and the net taxable HRA for the individual will be Rs 25,000 (HRA received) less Rs 14,000 (HRA deduction eligible), which will be equal to Rs 11,000.
Meanwhile if an individual stays in his own property and also gets an HRA from his employer, he will not be entitled for the HRA deduction under the Income Tax Act.
Also one often gets confused whether he will get the HRA benefit if he is already receiving deduction on his repayment of home loan. It should be understood that deduction on home loan and HRA benefits are two different issues under the Income Tax Act. The tax benefits on home loan and HRA can be claimed together by an individual if he fulfills the eligibility criteria on deductions relating to home loan and HRA.