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What is HRA | How is House Rent Allowance Calculated | YES BANK

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Living in rented accommodations can be a financial burden. The house rent can eat away a significant part of the salary. Hence, for the welfare of their employees, many organizations offer House Rent Allowance (HRA) as a part of the salaries paid every month. It provides tax benefits, helping ease the financial strain to some extent.

If you are a salaried employee, you need to understand how this allowance can help you reduce your tax liability.

What is HRA?

House Rent Allowance, commonly known as HRA, is a part of the salary a tax-paying individual receives. HRA is a practical and useful allocation of an individual's salary component, helpful while calculating taxes. If you reside in a rented house, you can claim HRA exemption under section 10(13A) of the Income Tax Act, as per Rule 2A, to lower your tax liability.

How is the House Rent Allowance (HRA) calculated?

HRA is calculated based on an individual's basic annual salary and city of residence. As per income tax rules, the deduction of House Rent Allowance is the least of the following amounts:

  1. Actual HRA component of salary

  2. 50% of the basic salary if the taxpayer resides in a metropolitan city (Delhi, Mumbai, Kolkata, or Chennai); 40% if the residence is in any other city

  3. Actual rent paid less 10% of the basic salary

If you wish to claim the exemption, you must pay the rent for the existing accommodation you have rented/occupied. If you own the house yourself, you are not eligible to avail of the House Rent Allowance exemption.

How is HRA calculated?

Let’s assume you are a salaried individual residing in Mumbai, a metro city. You pay a monthly rent of ₹15000 for your rented accommodation. That sums up to ₹1.8 lakh annually. The details below show your monthly earnings:

Basic Salary




Misc. Bonus


Special Allowance





In this case, the tax-deduction part of your House Rent Allowance would be the lowest from the following, considering your annual earnings:

Actual HRA (component of salary)

₹8000 x 12 = ₹96,000/-

50% of the basic salary because you reside in Mumbai

50% x ₹20000 x 12 = ₹1,20,000/-

Actual rent paid less 10% of the basic salary

(₹15000 x 12) – (10% x 20000 x 12) = ₹1,80,000 – ₹24000 = ₹1,56,000/-


From the above calculations, the lowest value, i.e., ₹96000/- is the amount of tax-exemption you can claim on house rent allowance. The remaining HRA amount will be taxable as per your income tax slab.

In the 2020 Union Budget, Finance Minister Nirmala Sitharaman announced a new tax regime. One of the most significant changes in this new taxation system is that it does not include some exemptions or deductions provided in the old regime. One of these exemptions includes HRA or House Rent Allowance. Thus, if you opt to file your taxes under the new tax regime, you will not be able to enjoy the deduction of HRA.


The benefit of House Rent Allowance is that it serves as a medium to reduce the taxable income, leading to a significant reduction in the tax that you have to pay. Therefore, you can utilize this means for tax relief and lower any strain on your resources when you file your taxes.

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