How is tax exemption on HRA calculated

It’s a common misconception that the tax exemption a person gets for paying house rent is equal to the HRA component of his/her salary. And usually we submit the receipt of house rent paid equal to the HRA component of our salary, even if it is more, to get the exemption on HRA.

But, do you know that the exemption limit on HRA is calculated in a different way by the tax man?

HRA exemption given is the minimum of the following,
a) HRA received
b) 40% of basic salary
c) Total HRA claimed – 10% of basic salary during the claim

For example, if your basic salary is 10,175 per month and the HRA component of the salary is 4,070 per month and you are claiming it for a period of one year then,

HRA received = 4,070 x 12 = Rs. 48,840
40% of basic salary = Rs. 48,840

If you are claiming HRA of Rs. 4,070 per month (48,840 per year), thinking that this is the upper limit, the third component (c) of HRA calculation becomes,
Total HRA claimed – 10% of Basic salary during the claim = 48,840 – 12,210 = Rs. 47,790, which makes the minimum of the three as 47,790.

Which means instead of Rs. 48,840 you will get an exemption for only Rs. 47,790!

Thus, you may have to work around with this a bit to get the maximum savings on HRA.