Explain how HRA exemption is calculated under the old tax regime, using an example.

What the interviewer wants to hear

• Exemption is the lowest of three limits
• Actual HRA received
• Rent paid minus 10% of salary (basic plus DA)
• 50% of salary in metro cities or 40% elsewhere
• Remaining HRA is taxable; rent proof and landlord PAN may be needed

Model answer

Under the old regime, HRA exemption is the lowest of three amounts. The first is the actual HRA received. The second is rent paid minus 10% of salary, where salary for this purpose is basic plus DA. The third is 50% of salary if the employee lives in a metro city, or 40% elsewhere. For example, take a basic of 25,000 a month, HRA of 12,500 and rent of 15,000 in a non-metro city. The limits are 12,500, then 15,000 minus 2,500 which is 12,500, and 40% of 25,000 which is 10,000. The lowest is 10,000, so 10,000 is exempt and 2,500 is taxable each month. Payroll uses the rent declaration to project tax and verifies rent receipts at year end, along with the landlord PAN where the rent is above the prescribed limit.

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