HRA Exemption
The tax-exempt portion of house rent allowance received from an employer.
The exemption is the least of actual HRA, rent paid minus 10% of salary, and 50% of salary in metro cities (40% elsewhere). It applies only under the old regime and needs the landlord's PAN above Rs 1 lakh annual rent.
Why HRA Exemption matters when comparing products
Understanding HRA exemption is crucial for Indian taxpayers as it directly impacts their taxable income under the old tax regime. A lower taxable income can free up more funds that could potentially be allocated towards various financial products like SIPs, insurance, or fixed deposits. Comparing financial products effectively requires a clear picture of one's disposable income after considering all available tax benefits.
Illustrative example
If a non-metro employee earns ₹50,000 monthly (salary for HRA calculation), pays ₹15,000 rent, and receives ₹20,000 HRA, the exemption is the least of: ₹20,000 (actual HRA), ₹10,000 (rent paid minus 10% of salary, i.e., ₹15,000 - ₹5,000), or ₹20,000 (40% of salary). Thus, ₹10,000 is tax-exempt.