Hi,
Though there is no limit for HRA, but the same should be so fixed as to give maximum benefit to employees so far as exemption on HRA is permitted under Section 10 of Income Tax Act. The relevant provisions under IT Act, with examples are reproduced:
The minimum of the following is available as exemption from employee’s earning.
The actual HRA received from your employer
OR
The actual rent paid by you for the house, minus 10% of your salary (this includes basic + dearness allowance, if any)
OR
50% of your basic salary (if you live in a metro) or 40% of your basic salary (if you live in a non-metro)
Let us consider a hypothetical case or evaluate with an example.
Consider the Salary Components as follows:
Basic: Rs. 15,000, Dear Allowance(DA) or other allowances Rs. 5,000 and HRA: Rs. 9,000
So a total salary of Rs 29,000
Let actual rent rent paid be: Rs. 10,000
You live in Mumbai (It is a Metro in Income Tax Computation. it is a Metro otherwise too!).
Now let us understand how the rule works.
1. The actual HRA received from employer = This Amount is Rs. 9,000
2. The actual rent paid for the house minus 10% of the salary (Excluding HRA Component)
This would be Rs. 10,000 – 10% of (Rs. 15,000 + Rs. 5,000) = Rs. 10,000 – Rs. 2,000 = Rs. 8,000
3. Fifty percent 50% of your basic salary
Since you live in a metro, this would be 50% of Rs. 15,000 = Rs. 7,500
The minimum amount out of 1, 2 and 3 is Rs. 7,500. Therefore, the amount of HRA exempt from tax is Rs. 7,500 per month.
The remaining HRA amount of Rs. 1,500 (Actual HRA received Rs. 9,000 Minus exempt HRA Rs. 7,500 = Rs. 1,500) would be added to your taxable income.