House Rent Allowance (HRA) Exemption: Complete Guide for FY 2025-26 / AY 2026-27
- HRA is exempt from income tax under Section 10(13A) read with Rule 2A, but only if you opt for the Old Tax Regime.
- The exempt HRA amount is the lowest of actual HRA received, rent paid minus 10% of salary, or 50% of salary for Delhi, Mumbai, Kolkata, and Chennai, or 40% of salary for all other cities.
- For HRA calculation, salary generally includes basic salary, dearness allowance if it forms part of retirement benefits, and turnover-based commission where applicable.
- Under the New Tax Regime, HRA exemption is not available.
What Is HRA and Who Can Claim It?
House Rent Allowance, or HRA, is a salary component paid by an employer to help an employee meet rental housing costs. A part of this allowance can be exempt from tax under Section 10(13A) , but only when the employee actually lives in rented accommodation, pays rent, and uses the Old Tax Regime. If the employee lives in their own house or does not pay rent, HRA becomes fully taxable.
You can generally claim HRA exemption if all of these apply:
- You are a salaried employee
- HRA is part of your salary structure
- You actually pay rent for the house you live in
- You are using the Old Tax Regime
Self-employed persons, or salaried employees whose salary does not include HRA, cannot claim HRA exemption under Section 10(13A). They may instead look at Section 80GG.
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What’s New for FY 2025-26 / AY 2026-27
The key point for this year is that FY 2025-26 should still be understood under the law applicable to that year. Readers should not mix post 1 April 2026 renumbering with HRA claims for FY 2025-26.
Important points for FY 2025-26:
- The New Tax Regime continues to be the default regime unless the taxpayer validly opts otherwise
- HRA exemption is not available under the New Tax Regime
- For HRA purposes, the specified metro cities remain Delhi, Mumbai, Kolkata, and Chennai
- If annual rent paid exceeds Rs 1,00,000, the employee must report the landlord’s PAN to the employer
Old Tax Regime vs. New Tax Regime: The Critical Difference
Before calculating HRA, first check which tax regime you are using. Under the Old Tax Regime, HRA exemption is available. Under the New Tax Regime , it is not. That single point decides whether the formula matters at all.
| Feature | Old Tax Regime | New Tax Regime |
|---|---|---|
| HRA exemption under Section 10(13A) | Available | Not available |
| Most deductions and exemptions | Available subject to conditions | Largely not available |
| Default regime status | Not default | Default |
Feature
Old Tax Regime
New Tax Regime
Feature
Old Tax Regime
New Tax Regime
Feature
Old Tax Regime
New Tax Regime
If you are under the New Tax Regime, the full HRA received from your employer becomes taxable salary, even if you actually pay rent.
Do not rely on a universal shortcut like “if deductions exceed a certain amount, the Old Regime is always better.” The better regime depends on your salary, rebate position, standard deduction, home loan, deductions, and overall income structure.
You can inform your employer during the year so that monthly TDS is computed correctly, but the final regime position is determined through your return, subject to the applicable rules.
Key Factors That Affect Your HRA Calculation
Your HRA exemption depends mainly on these inputs:
| Input | Meaning | Where to Check |
|---|---|---|
| Actual HRA received | HRA component paid by employer | Salary slip / Form 16 |
| Salary for HRA purpose | Basic salary + DA if part of retirement benefits + turnover-based commission where applicable | Salary structure |
| Actual rent paid | Rent actually paid for the house you live in | Rent agreement / receipts / bank trail |
| City of residence | Metro or non-metro classification | Rental address |
Input
Meaning
Where to Check
Input
Meaning
Where to Check
Input
Meaning
Where to Check
Input
Meaning
Where to Check
Important note: many people calculate HRA using only basic salary. That is not always correct. If the employee receives commission as a fixed percentage of turnover achieved, that also enters the salary base for HRA calculation.
The HRA Exemption Formula Explained
Your exempt HRA is the lowest of these three figures:
A. Actual HRA received
B. Rent paid minus 10% of salary
C. 50% of salary if the house is in Delhi, Mumbai, Kolkata, or Chennai, otherwise 40% of salary
So:
Exempt HRA = Minimum of A, B, and C
Taxable HRA = Actual HRA received minus Exempt HRA
Use our step-by-step HRA calculation guide to apply this formula to your own salary and rent figures. Many employees focus only on the metro or non-metro percentage, but that is only one part of the formula. The final exempt amount is always the lowest of the three.
Step-by-Step HRA Calculation with Worked Examples
Example 1: Metro City, Mid-Range Salary
| Component | Monthly | Annual |
|---|---|---|
| Basic Salary | Rs 30,000 | Rs 3,60,000 |
| HRA Received | Rs 15,000 | Rs 1,80,000 |
| Rent Paid | Rs 12,000 | Rs 1,44,000 |
| City | Mumbai | - |
Component
Monthly
Annual
Component
Monthly
Annual
Component
Monthly
Annual
Component
Monthly
Annual
Calculation:
A. Actual HRA = Rs 1,80,000
B. Rent paid minus 10% of salary = Rs 1,44,000 minus Rs 36,000 = Rs 1,08,000
C. 50% of salary = Rs 1,80,000
Exempt HRA = Lowest of Rs 1,80,000, Rs 1,08,000, Rs 1,80,000 = Rs 1,08,000
Taxable HRA = Rs 1,80,000 minus Rs 1,08,000 = Rs 72,000
Example 2: Non-Metro City
| Component | Monthly | Annual |
|---|---|---|
| Basic Salary | Rs 50,000 | Rs 6,00,000 |
| HRA Received | Rs 20,000 | Rs 2,40,000 |
| Rent Paid | Rs 18,000 | Rs 2,16,000 |
| City | Pune | - |
Component
Monthly
Annual
Component
Monthly
Annual
Component
Monthly
Annual
Component
Monthly
Annual
Calculation:
A. Actual HRA = Rs 2,40,000
B. Rent paid minus 10% of salary = Rs 2,16,000 minus Rs 60,000 = Rs 1,56,000
C. 40% of salary = Rs 2,40,000
Exempt HRA = Lowest of Rs 2,40,000, Rs 1,56,000, Rs 2,40,000 = Rs 1,56,000
Taxable HRA = Rs 2,40,000 minus Rs 1,56,000 = Rs 84,000
Important point: even if the same employee lived in Delhi, the exemption would not automatically become higher unless the least-of-three result changes. In this example, rent minus 10% of salary remains the limiting factor.
Example 3: High Earner
| Component | Monthly | Annual |
|---|---|---|
| Basic Salary | Rs 1,20,000 | Rs 14,40,000 |
| HRA Received | Rs 50,000 | Rs 6,00,000 |
| Rent Paid | Rs 35,000 | Rs 4,20,000 |
| City | Delhi | - |
Component
Monthly
Annual
Component
Monthly
Annual
Component
Monthly
Annual
Component
Monthly
Annual
Calculation:
A. Actual HRA = Rs 6,00,000
B. Rent paid minus 10% of salary = Rs 4,20,000 minus Rs 1,44,000 = Rs 2,76,000
C. 50% of salary = Rs 7,20,000
Exempt HRA = Lowest of Rs 6,00,000, Rs 2,76,000, Rs 7,20,000 = Rs 2,76,000
Taxable HRA = Rs 6,00,000 minus Rs 2,76,000 = Rs 3,24,000
For many high earners, rent minus 10% of salary becomes the real limiting factor.
Example 4: Partial-Year Rent
Vikram pays rent of Rs 15,000 per month from April to September and then shifts to family accommodation for October to March. His basic salary is Rs 40,000 per month, HRA is Rs 16,000 per month, and he lives in Chennai.
For the 6 rent-paying months:
A. HRA = Rs 16,000 x 6 = Rs 96,000
B. Rent minus 10% of salary = Rs 90,000 minus Rs 24,000 = Rs 66,000
C. 50% of salary = Rs 1,20,000
Exempt HRA for those 6 months = Rs 66,000
For the next 6 months, no rent is paid, so exemption is nil.
Annual HRA received = Rs 1,92,000
Annual exempt HRA = Rs 66,000
Annual taxable HRA = Rs 1,26,000
This is why mid-year changes should be handled month by month rather than using a single annual shortcut.
Special Scenarios
1. Paying Rent to Parents
You can pay rent to a parent and claim HRA exemption if the arrangement is genuine. That means:
- The parent should own the property or have a clear legal right to let it out
- A proper rent agreement should exist
- Rent should actually be paid, preferably through bank transfer
- The parent should disclose the rental income in their return where applicable
This is valid only when the tenancy is real and the payment trail supports it.
Rent paid to a spouse is much more likely to be challenged because the arrangement often fails the genuineness test.
2. Claiming HRA and Home Loan Together
Yes, it is possible to claim both HRA exemption and home loan interest deduction, but the facts must support the claim.
This generally works more cleanly where:
- Your owned property is in a different city from your workplace, or
- There is a genuine practical reason why you do not live in the owned property
If both properties are in the same city, the claim can attract closer scrutiny . Keep supporting facts ready, such as work location, commuting difficulty, or other practical reasons.
Also, avoid assuming this always requires a specific ITR form. The correct return form depends on the taxpayer’s complete profile, not only on this combination.
3. HRA After a Job Change or Salary Revision
If you change jobs during the year, HRA exemption has to be worked out separately for each employer’s period. Each employer normally considers only the salary paid during its own period. If excess TDS was deducted because rent documents were not submitted in time, you can still claim the correct HRA while filing your return.
If salary changes mid year, the HRA calculation should be recomputed from the month of change. This is important because 10% of salary, and the 40% or 50% cap, may both change.
4. Living in Your Own House
If you live in a house you own and do not pay rent for another residence, HRA is fully taxable. The exemption requires actual rent payment.
Section 80GG: No HRA in Salary? You Still Have Options
If you do not receive HRA as part of salary, or you are self-employed, Section 80GG may allow a deduction for rent paid. This deduction is available only under the Old Tax Regime and is subject to conditions, including filing Form 10BA.
The deduction is the least of:
- Rent paid minus 10% of total income
- Rs 5,000 per month
- 25% of total income
This is a fallback deduction, not a substitute for regular HRA structuring.
Metro vs. Non-Metro Cities
For HRA purposes, only these four cities qualify for the 50% salary limit:
- Delhi
- Mumbai
- Kolkata
- Chennai
All other cities, including Bengaluru, Hyderabad, Pune, Ahmedabad, Jaipur, and others, use the 40% limit.
| City Type | Cities | Limit |
|---|---|---|
| Metro | Delhi, Mumbai, Kolkata, Chennai | 50% of salary |
| Non-metro | All other cities | 40% of salary |
City Type
Cities
Limit
City Type
Cities
Limit
Documentation Checklist
Keep these records for a proper HRA claim:
| Document | When Needed | Notes |
|---|---|---|
| Rent receipts | Usually required by employer | Keep landlord name, amount, and period |
| Rent agreement | Strongly recommended | Supports genuineness |
| Landlord PAN | If annual rent exceeds Rs 1,00,000 | Report to employer |
| Bank transfer proof | Best practice | Stronger than cash |
| Form 12BB | For employer declaration | Used for TDS computation |
| Form 10BA | For Section 80GG | Not for regular HRA |
| Parent ownership and rent trail | If paying rent to parents | Important in scrutiny cases |
Document
When Needed
Notes
Document
When Needed
Notes
Document
When Needed
Notes
Document
When Needed
Notes
Document
When Needed
Notes
Document
When Needed
Notes
Document
When Needed
Notes
If annual rent exceeds Rs 1,00,000, landlord PAN must be reported if the monthly rent exceeds ₹50,000; TDS on rent obligations under Section 194-IB may also apply to the employer.
How to Claim HRA Exemption in Your ITR
Step 1: Submit rent details to employer during the year using Form 12BB so that TDS is computed correctly.
Step 2: Check Form 16 at year end and verify that exempt HRA has been considered properly.
Step 3: Choose the correct return form based on your overall income profile. Do not assume the form choice only on the HRA issue. Current year ITR instructions should be followed at filing time.
Step 4: In the salary schedule of the return, report the exempt HRA under the allowance exemption section where applicable.
Step 5: If employer TDS was higher because HRA was not fully considered, you can still claim the correct exemption in the return and seek refund .
Common Errors and How to Avoid Them
| Error | Risk | Better Approach |
|---|---|---|
| Using gross salary instead of HRA salary base | Overclaim | Use basic + eligible DA + turnover-based commission where applicable |
| Treating all big cities as metro | Wrong exemption | Use only Delhi, Mumbai, Kolkata, Chennai |
| Ignoring rent-free months | Overclaim | Compute month by month |
| Claiming HRA under New Regime | Invalid claim | First confirm tax regime |
| No landlord PAN above Rs 1,00,000 annual rent | Employer-level issue | Collect PAN early |
| Cash rent with weak proof | Scrutiny risk | Prefer bank trail |
| Wrong return form assumption | Filing error | Check current year ITR instructions |
Error
Risk
Better Approach
Error
Risk
Better Approach
Error
Risk
Better Approach
Error
Risk
Better Approach
Error
Risk
Better Approach
Error
Risk
Better Approach
Error
Risk
Better Approach
Automate HRA Calculation with BUSY Payroll
Manual HRA calculation becomes messy when there are salary revisions, job changes, city changes, part-year rent, or missing documents. A payroll system is useful when it can:
- Store HRA separately in salary structure
- Classify metro and non-metro cities correctly
- Recalculate exemption when salary or rent changes
- Flag landlord PAN requirement once annual rent crosses Rs 1,00,000
- Support Form 12BB workflows
- Help with TDS consistency and Form 16 output. Correct HRA exemption data must flow into TDS return filing (Form 24Q) ; errors here affect employee Form 16.
For employers, the value of automation is not just convenience. It reduces monthly TDS errors , correction work, and year-end employee disputes.
Conclusion
HRA remains one of the most useful salary-linked tax exemptions for salaried employees, but only under the Old Tax Regime and only when the claim is calculated correctly. The formula itself is simple. What creates errors are the edges: wrong salary base, wrong city classification, no rent proof, missing landlord PAN, job changes, and confusion between old and new regime.
