HRA (House Rent Allowance)

HRA in the salary structure

HRA is the second-largest fixed component in most private-sector structures after basic. A common design is 50% of basic for metro-based employees and 40% for others, mirroring the exemption limits under the old regime. It is paid regardless of whether the employee actually rents a home.

HRA is an excluded allowance under the Code on Wages definition of wages, so it does not attract EPF and is not part of the gratuity base. But because excluded allowances cannot exceed 50% of total remuneration without an add-back, HRA cannot be inflated to shrink the statutory base.

Tax treatment: old regime versus new regime

Under the new regime, which is the default, HRA is simply taxable salary. Under the old regime, section 10(13A) exempts the least of: actual HRA received; rent paid minus 10% of salary (basic plus DA); and 50% of salary in Delhi, Mumbai, Kolkata and Chennai or 40% elsewhere. The employee must actually pay rent and provide rent receipts; the landlord's PAN is needed where annual rent exceeds a prescribed limit.

Payroll must collect the regime declaration at the start of the financial year and only apply the exemption in TDS computation for old-regime employees who submit proof.

• New regime: HRA fully taxable, no exemption
• Old regime: exemption is the least of the three limits under section 10(13A)
• Rent receipts, and landlord PAN above the prescribed rent threshold, are needed for TDS purposes
• Employees living in their own home get no exemption in either regime

Common payroll errors with HRA

Applying the old-regime exemption by default without a declaration, pro-rating HRA differently from basic for LOP, and counting HRA as ESI-exempt are the usual mistakes. HRA is part of gross for ESI; only EPF and gratuity leave it out.

For minimum-wage staff, splitting the notified minimum into basic and HRA to save EPF is not compliant: the minimum wage must be paid as basic plus VDA.