HRA Exemption — How the Formula Works and What You Can Actually Claim

Anjali earns ₹18 LPA in Bengaluru. Her salary structure includes ₹90,000 HRA per year. She pays ₹18,000/month rent. Under the old regime, she assumes she can claim her full ₹90,000 HRA as exempt.

Her actual exemption: ₹66,000. Not ₹90,000.

The HRA exemption formula has three inputs and takes the lowest of all three — most employees either don’t run the formula or assume the smallest number is “actual HRA received.” That assumption is wrong about half the time.

All figures use FY 2025-26 rules. Verified against incometax.gov.in.

HRA exemption is only available in the old regime

Before the formula: this matters only if you’re on the old tax regime. Under the new regime, HRA exemption under Section 10(13A) is not available. The new regime takes away HRA, LTA, 80C, and most other exemptions in exchange for lower slab rates.

If you’re on the new regime and paying rent, the rent does not reduce your taxable income. Full stop.

Under the old regime, HRA received as part of your salary is partially or fully exempt from tax, subject to the formula below.

→ Run both regimes with your actual rent on Unpakk — toggle old/new to see the exact difference.

The three-part formula

HRA exempt = lowest of:

1. Actual HRA received from the employer
2. 50% of basic salary (if in a metro city) or 40% of basic salary (if in a non-metro city)
3. Actual rent paid minus 10% of basic salary

All three numbers are calculated annually. The lowest one is the exempt amount.

“Basic salary” in this formula means basic + dearness allowance (DA). For most private sector employees, DA is zero, so it’s just basic.

Metro vs non-metro: the four cities that matter

Metro cities (50% rule): Mumbai, Delhi, Kolkata, Chennai

Non-metro (40% rule): Bengaluru, Hyderabad, Pune, Ahmedabad, and every other city in India

This classification is fixed by the Income Tax Act and has not been updated in decades. Bengaluru — the largest IT hub in India — is non-metro for HRA purposes. This costs Bengaluru employees approximately ₹40,000–₹80,000 in additional taxable HRA every year compared to Mumbai or Delhi colleagues with identical salaries.

Worked examples

Example 1 — Anjali, Bengaluru, ₹18 LPA

Salary structure:

• Annual basic: ₹7,20,000 (₹60,000/month)
• Annual HRA received: ₹3,60,000 (₹30,000/month, 50% of basic)
• Monthly rent paid: ₹18,000 → Annual: ₹2,16,000

Three calculations:

1. Actual HRA received: ₹3,60,000
2. 40% of basic (non-metro): 40% × ₹7,20,000 = ₹2,88,000
3. Rent − 10% of basic: ₹2,16,000 − ₹72,000 = ₹1,44,000

Exempt HRA = lowest = ₹1,44,000

Taxable HRA = ₹3,60,000 − ₹1,44,000 = ₹2,16,000 (added to income, taxed at slab rate)

Anjali’s original assumption of ₹90,000 was wrong in both direction and magnitude — her actual exemption is ₹1,44,000 (higher than she thought), but her taxable HRA is ₹2,16,000 (a surprise).

Example 2 — Rahul, Mumbai, ₹25 LPA

Salary structure:

• Annual basic: ₹10,00,000 (₹83,333/month)
• Annual HRA received: ₹5,00,000 (50% of basic)
• Monthly rent: ₹40,000 → Annual: ₹4,80,000

Three calculations:

1. Actual HRA received: ₹5,00,000
2. 50% of basic (metro): ₹5,00,000
3. Rent − 10% of basic: ₹4,80,000 − ₹1,00,000 = ₹3,80,000

Exempt HRA = ₹3,80,000

Taxable HRA = ₹5,00,000 − ₹3,80,000 = ₹1,20,000

Example 3 — Same salary, lower rent (Rahul moves to cheaper accommodation at ₹25,000/month)

Three calculations:

1. Actual HRA received: ₹5,00,000
2. 50% of basic (metro): ₹5,00,000
3. Rent − 10% of basic: ₹3,00,000 − ₹1,00,000 = ₹2,00,000

Exempt HRA = ₹2,00,000

Taxable HRA jumps to ₹3,00,000. Moving to cheaper accommodation reduces your HRA exemption — a counterintuitive consequence of the formula.

Documentation required

Your employer applies HRA exemption based on what you declare. At the end of the year, you may need to submit:

Rent receipts: Monthly receipts showing amount paid, property address, landlord name and signature. Most employers have a standard format — use theirs.

Landlord’s PAN: Mandatory if annual rent exceeds ₹1 lakh (₹8,334/month). Without it, your employer cannot apply the exemption. Collect this at the start of the financial year — don’t wait until March.

Rent agreement: Not always mandatory, but frequently asked for. A registered agreement is ideal; a notarised or stamp-paper agreement is commonly accepted.

Self-declaration: If you pay rent in cash or your landlord is a family member, a detailed self-declaration is typically required, and the employer may apply the exemption conservatively.

Common mistakes that reduce your exemption

Calculating on gross salary instead of basic: The formula uses basic salary only — not HRA, not special allowance, not gross. Using gross inflates the “10% of basic” deduction in part 3, which lowers your exempt amount.

Missing the landlord PAN for rents above ₹8,333/month: The employer will not apply the exemption without it. You can still claim it at ITR filing with proper documentation, but it complicates the process.

Declaring rent that doesn’t match receipts: HRA exemption claimed must match actual rent paid with documentation. Inflated declarations are checked at the scrutiny assessment stage.

Not submitting proofs on time: Most employers have a January–February deadline for investment proofs including rent. Missed deadline means the employer computes TDS without HRA exemption. You can still claim it directly in your ITR — the overpaid TDS comes back as a refund.

HRA when rent is paid to a parent

Paying rent to a parent and claiming HRA exemption is legal — but requires discipline.

Requirements:

• Parent must actually own the property (check title documents)
• Rent must be actually paid (bank transfer, not cash)
• Parent must declare this rental income in their own ITR
• Proper rent agreement and receipts required

The rent paid becomes rental income for the parent. Their taxable income from it is (annual rent − 30% standard deduction for property maintenance). If your parent’s total income is low, the tax outflow on their end may be far less than your HRA tax saving at your slab rate.

Example: You pay ₹20,000/month rent to parent. They declare ₹2,40,000 rental income. After 30% deduction, taxable = ₹1,68,000. If parent’s total income is below the basic exemption limit (₹3 lakh for non-senior, ₹3.5 lakh for senior citizens in old regime), they pay zero tax. You save HRA exemption at your 20% or 30% slab.

Claiming HRA at ITR filing vs through employer

If your employer applied HRA exemption correctly based on your declaration: nothing extra to do at filing — Form 16 Part B will show the correct exempt HRA.

If your employer missed it (late proof submission, landlord PAN not available in time): you can claim it directly in your ITR under “Exemptions under Section 10.” Your return will show lower taxable income than Form 16 and generate a refund for the excess TDS.

The deduction is claimed in Schedule S (Salary) of your ITR form. You’ll need to calculate the exempt amount manually and enter it. Keep all documentation — rent receipts, landlord PAN — for at least 6 years in case of scrutiny.

Frequently asked questions

Can I claim HRA if I live with my parents and don’t pay rent? No. You must actually pay rent to claim the exemption. There’s no HRA claim if you own the accommodation or live rent-free.

What if HRA is not part of my salary structure? If your employer doesn’t give HRA as a named component, you cannot claim exemption under Section 10(13A). However, you can claim a deduction under Section 80GG — for rent paid when HRA is not received — up to ₹5,000/month (₹60,000/year), subject to conditions.

Can both spouses claim HRA for the same rented house? Only if both are named in the rent agreement and paying rent proportionally. Both need separate rent receipts. It’s legitimate if the split is genuine and documented.

My HRA is 40% of basic but I live in Delhi. Am I using the wrong rate? No — the metro/non-metro classification in the formula is based on where you actually live and pay rent, not your employer’s location or your HR-assigned rate. Delhi is metro (50%), regardless of what your payslip says.

FY 2025-26 rules. Verified against Section 10(13A) of the Income Tax Act and incometax.gov.in (June 2026).

This guide is for informational purposes. Tax laws change — verify against incometax.gov.in for your specific situation.