Rule 2A of Income-tax Rules, 1962: House Rent Allowance Exemption
Rule 2A prescribes the limits for exemption of house rent allowance (HRA) under Section 10(13A) of the Income-tax Act, 1961. The exempt amount is the lowest of three prescribed figures.
What does Rule 2A provide?
For a salaried employee receiving HRA and occupying rented residential accommodation, the exempt HRA for the relevant period is the least of the following:
- Actual HRA received during the relevant period.
- Rent paid minus 10% of salary due for the relevant period.
- 50% of salary where the accommodation is in Mumbai (Bombay), Kolkata (Calcutta), Delhi or Chennai (Madras), or 40% of salary at any other location.
Any HRA received in excess of the exempt amount is taxable as salary income. If rent paid does not exceed 10% of salary, the second figure does not produce a positive exemption.
HRA exemption calculation at a glance
| Criterion | Amount considered |
|---|---|
| Actual HRA | HRA received for the relevant period |
| Rent-based limit | Actual rent paid less 10% of salary |
| Metro limit | 50% of salary in Mumbai, Kolkata, Delhi or Chennai |
| Other locations | 40% of salary |
Meaning of salary and relevant period
For Rule 2A, the expression salary has the meaning assigned in Rule 2(h) of Part A of the Fourth Schedule. For practical HRA computations, it ordinarily includes basic salary, dearness allowance to the extent it forms part of retirement benefits, and commission calculated as a fixed percentage of turnover achieved by the employee, where applicable.
The relevant period is the period during the previous year for which the employee occupies the rented accommodation. Changes in salary, HRA, rent or city during the year may require separate period-wise calculations.
Illustrative example
Suppose an employee living in Delhi receives monthly basic salary of Rs. 60,000 and HRA of Rs. 25,000, and pays monthly rent of Rs. 22,000. Assume there are no other salary components relevant to the calculation.
| Exemption test | Monthly amount |
|---|---|
| Actual HRA received | Rs. 25,000 |
| Rent less 10% of salary: Rs. 22,000 - Rs. 6,000 | Rs. 16,000 |
| 50% of salary (Delhi) | Rs. 30,000 |
| HRA exempt (lowest figure) | Rs. 16,000 |
| Taxable HRA | Rs. 9,000 |
On these assumptions, annual exempt HRA is Rs. 1,92,000 and annual taxable HRA is Rs. 1,08,000, provided the same circumstances continue for all 12 months and the exemption is otherwise available.
Conditions and supporting documents
HRA exemption generally requires actual payment of rent for residential accommodation occupied by the employee. An employee living in their own home without paying rent cannot claim the exemption merely because HRA appears in the salary structure. Rent receipts, a rental agreement and payment records may help substantiate the claim. Employer reporting requirements can also require the landlord's PAN where annual rent exceeds Rs. 1,00,000.
Statutory text of Rule 2A
Under the heading Determination of Income - A. Salaries, Rule 2A, titled Limits for the purposes of section 10(13A), sets the amount excluded from total income at the least of:
- the actual amount of the special allowance received in respect of the relevant period;
- the amount by which rent actually paid for occupied residential accommodation exceeds one-tenth of salary due for that period; or
- one-half of salary for accommodation in Bombay, Calcutta, Delhi or Madras, or two-fifths of salary for accommodation at any other place.
The Explanation defines salary by reference to Rule 2(h) of Part A of the Fourth Schedule and defines the relevant period as the period of occupation of the accommodation during the previous year.
Frequently asked questions
Is HRA exemption available under the new tax regime?
No. The Section 10(13A) exemption is generally not available when computing tax under the new regime.
Does Rule 2A allow 50% of salary in every city?
No. The 50% ceiling applies only to Mumbai, Kolkata, Delhi and Chennai. For other locations, the ceiling is 40%.
Is the full HRA received exempt?
Not necessarily. The exemption is restricted to the lowest of actual HRA, rent paid less 10% of salary, and the applicable 50% or 40% salary ceiling.
Editorial note: This article describes the framework of Rule 2A of the Income-tax Rules, 1962 and should be read with the legislation and notifications applicable to the relevant tax year.