If you are a salaried professional and living in a rented house, then you must be aware of the HRA component of your salary. HRA is house rent allowance paid by company to meet your rent expenses and this amount is tax deductible (tax free) upto some extent. This tax free amount is calculated on the basis of 3 rules defined by Income tax department.

Normally, most of us have this understanding that whatever HRA amount that we receive as part of our salary is the maximum amount that is considered for tax rebate.

For example, if you are receiving 5000 per month as HRA, then while calculating the HRA tax rebate, only 5000 will be considered even if you pay more rent. This is NOT correct. Read on to get the details.

The three income tax rules for calculating tax rebate on HRA

The exemption is capped to the least of follwowing three values:

1. Actual HRA received during the financial year.
2. 50% of BASIC salary in case of residential accommodation taken on rent is situated in a METRO city (Only Mumbai, Kolkata, Delhi or Chennai) and 40% of BASIC salary in Non-metro cities.
3. Rent paid in excess of 10% of BASIC salary. i.e Excess Of Rent = Rent Paid - 10% of Basic

HRA amount that is part of your salary package is actually defined by your Basic salary in most cases. i.e. It is normally 40% or 50% of your basic salary. So, If your basic salary is INR 10,000 per month, then your HRA component would be either INR 4000 or INR 5000. The 40% or 50% factor is dependent on your company policies. The income tax rules also base their tax rebate calculation on the basic salary amount as you can see in rule 2 and 3 above.

HRA received = Rent is NOT equal to MAXIMUM tax rebate. How?

Lets consider the example:

Basic salary	10,000
HRA (50% of Basic Salary)	5000
Residence	Metro City - Delhi
Rent paid/declared	5,000 per month

Now if you are declaring rent of Rs. 5000 per month considering that you decalring more than your HRA amount i.e. INR 5,000 would not make any difference, then you are wrong. Quickly running through the 3 rules would make things clear here.

Rule	Eligible Amount
Rule 1	Actual HRA (12 months)	60,000 (12*5,000)
Rule 2	50% of yearly Basic Salary	60,000 (50% of 10,000*12)
Rule 3	Excess Of Rent = Rent Paid - 10% of Basic	48,000 (60,000 - 12,000 [10% of 1,20,000])
Least of the three amount:	48,000

Hence, if you see carefully, you are only elgible for Rs. 48,000 tax rebate even though your yearly HRA and rent paid and declared amount is 60,000. Income tax officials have designed the rules so cleverly that you will always end up getting the least tax rebate if you look at the HRA component alone.

How to hack these rules and get maximum rebate?

It is simple mathematics if you just look at the rules and do some calculation.
The rules are primarily based on basic salary, HRA amount and rent paid/declared. You can't change basic salary and HRA component. But you can certainly change your rent paid amount. So, the hack is that if you pay a rent figure which brings the amount in all three rules equivalent to the maximum of three, you would be eligible for maximum tax rebate.

Here is an example to clarify the concept more. We are just increasing the rent paid amount to Rs. 6,000 keeping basic and HRA same as in above example and re-calculate the 3 rules:

Rule	Eligible Amount
Rule 1	Actual HRA (12 months)	60,000 (12*5,000)
Rule 2	50% of yearly Basic Salary	60,000 (50% of 10,000*12)
Rule 3	Excess Of Rent = Rent Paid - 10% of Basic	60,000 (72,000 - 12,000 [10% of 1,20,000])
Least of the three amount:	60,000

So, if you look at the least amount now, it is INR 60,000 which is equal to the maxmum of three values too.

How to find this optimum value of rent for maximum tax benefit?

Hmm..As i said it is a simple mathematical formula but if you just want some tool to do it for your, here is a simple online FREE HRA tax exempton calculator which can help you with the best value of rent if you enter you enter your basic and HRA amounts.

If you want to do it on your own, here are the steps you should follow:

1. Find the maximum value by applying Rule 1 and Rule 2. Lets call this value 'Optimum'
2. Now use this mathematical formula to find the Rent (yearly):
   
   [(10 * Optimum) + Yearly Basic Salary] / 10 = YearlyRent
   
   This will give you the value of Yearly Rent that will give you the maximum tax rebate. Divide this amount by 12 to reach the figure of monthly rent.

That's it. You are the winner now :)

Comments, suggestions and queries are most welcome.