One tax exemption almost everybody can avail is on House Rent Allowance (HRA)
To calculate HRA exemption, use the least of the following amounts:
- Actual house Rent allowance received
- Rent paid in excess of 10% of salary
- 50% or 40% of salary (50% in case of Delhi, Mumbai, Kolkata & Chennai, 40% for other cities)
Salary for this purpose means :
basic salary + Dearness allowance + commission based on percentage (in any)
Here is an example of calculating HRA exemption :-
Basic Salary – Rs. 8,000 p.m.
Dearness allowance – Rs. 2,000p.m.
HRA received (actual) – Rs. 4,000p.m.
Actual rent paid – Rs. 5,000p.m
Adding it up for a year we get :-
Actual amount of HRA received (Rs.4,000*12) = Rs. 48,000
Rent paid in excess of 10% of salary (Rs. 5.000 * 12 – 10% of 10,000 * 12) = Rs. 48,000
50% of Rs. 1,20,000 = Rs.60,000
The least amount here is Rs. 48,000, so all of Rs. 48,000 is exempt from Income Tax.
* salary includes basic salary + dearness allowance
* Assuming that Delhi is the city for the purpose of this calculation