Tax Exemptions
HRA Exemption: How to Calculate and Claim House Rent Allowance (2025)
House Rent Allowance (HRA) exemption under Section 10(13A) is one of the most valuable deductions available to salaried employees in India who live in rented accommodation. Available only in the old tax regime, it can exempt Rs 1–4 lakh or more from tax every year depending on your salary structure and city of residence. This guide shows you exactly how to compute it.
Min of 3 rules
The formula — lowest of 3 figures is exempt
50% of basic
Metro city limit (Mumbai, Delhi, Kolkata, Chennai)
Rs 1L/yr
Rent threshold above which landlord PAN is required
Old regime only
HRA not available if you opt for new tax regime
What Is HRA and How Does the Exemption Work?
House Rent Allowance (HRA) is a component of many employees' salary packages intended to help cover the cost of rented residential accommodation. While HRA is received as part of salary, Section 10(13A) of the Income Tax Act provides an exemption for a portion of it — the exempt portion is not counted as taxable income and can result in significant tax savings for employees in high-rent cities.
The exemption is not fixed at the full HRA amount received. Instead, it is calculated using the "minimum of three" formula prescribed by Rule 2A of the Income Tax Rules, 1962. The three values are computed based on your actual HRA received, actual rent paid, and your basic salary — and the lowest of the three is the exempt HRA. Any HRA received above this exemption limit is fully taxable as part of salary income.
A critical point for AY 2025-26: HRA exemption is entirely unavailable in the new tax regime. If you have opted for the new regime (which is the default), the entire HRA received from your employer is taxable — even if you pay significant rent. This is the primary reason why the old regime continues to be the better choice for employees living on rent in metro cities with a substantial HRA component in their salary structure.
New Regime Taxpayers: HRA Is Fully Taxable
If you are filing under the new tax regime, your HRA is 100% taxable. To claim HRA exemption, you must opt for the old tax regime by filing Form 10-IEA before July 31, 2025 and informing your employer at the start of the financial year. Many employees who pay substantial rent in metro cities find that the old regime + HRA exemption produces a significantly lower tax liability than the new regime without deductions.
The Three-Rule HRA Exemption Formula Explained
Under Rule 2A of the Income Tax Rules and Section 10(13A), HRA exemption is the minimum (lowest) of the following three amounts:
Actual HRA Received
The total amount of House Rent Allowance paid to you by your employer during the financial year as part of your salary package. This figure appears in your salary slip and Form 16. If HRA varies month to month, use the annual total.
Example (Rs 7.5L basic): Rs 3,75,000 HRA received
Rent Paid Minus 10% of Basic Salary
Actual annual rent paid to the landlord, reduced by 10% of your basic salary (plus Dearness Allowance where DA is included for retirement benefit). This rule ensures that tax benefit is available only on rent that genuinely exceeds what the employer considers a basic housing threshold.
Example: Rs 2,88,000 rent – Rs 75,000 (10% of Rs 7.5L) = Rs 2,13,000
50% / 40% of Basic Salary
50% of basic salary if the rented accommodation is located in a metro city (Mumbai, Delhi, Kolkata, Chennai). 40% of basic salary for all other cities. This cap ensures that the exemption is tied to your salary level and city category.
Example (Delhi — metro): 50% × Rs 7,50,000 = Rs 3,75,000
The minimum of these three figures is the HRA exemption. In the example above: minimum of Rs 3,75,000 / Rs 2,13,000 / Rs 3,75,000 = Rs 2,13,000 exempt. The remaining Rs 3,75,000 – Rs 2,13,000 = Rs 1,62,000 HRA is taxable.
Worked Example: Rs 15 Lakh CTC — Complete HRA Calculation
Profile: CTC Rs 15,00,000 | Basic salary Rs 7,50,000 (50% of CTC) | HRA Rs 3,75,000 (50% of basic, per salary structure) | Monthly rent Rs 24,000 in Delhi (metro) | Annual rent = Rs 2,88,000
Step 1: Compute All Three Figures
Figure 1 — Actual HRA received
As per salary slip
Rs 3,75,000
Figure 2 — Rent paid minus 10% of basic
Rs 2,88,000 – (10% × Rs 7,50,000) = Rs 2,88,000 – Rs 75,000
Rs 2,13,000
Figure 3 — 50% of basic (metro city: Delhi)
50% × Rs 7,50,000
Rs 3,75,000
Step 2: Find the Minimum — That Is Your Exemption
Why Figure 2 Was the Minimum
The rent paid (Rs 2.88L) was lower than both HRA received (Rs 3.75L) and 50% of basic (Rs 3.75L). Figure 2, which caps exemption at actual rent contribution beyond the 10% basic threshold, is therefore the binding constraint. To get a higher HRA exemption, paying higher rent (up to Rs 3.75L/year in this case) would increase the Figure 2 result until it matches Figure 1 or Figure 3.
Metro vs Non-Metro: How City Classification Affects HRA
Metro Cities — 50% of Basic Salary
Only these four cities qualify for the 50% Figure 3 limit. The higher limit reflects elevated real estate costs in these metros. An employee with Rs 10 lakh basic salary in Mumbai can use up to Rs 5 lakh as the Figure 3 cap, making full HRA exemption achievable at higher rent levels.
Non-Metro Cities — 40% of Basic Salary
Despite Bengaluru and Hyderabad having rental costs comparable to Delhi, they are not legally classified as metro cities for HRA purposes. An employee in Bengaluru with Rs 10L basic salary has a Figure 3 cap of Rs 4 lakh — Rs 1 lakh less than an equivalent employee in Delhi. This anomaly is a known limitation of the current rules.
Impact Comparison: Same Salary, Metro vs Non-Metro
| Parameter | Delhi (Metro) | Bengaluru (Non-Metro) |
|---|---|---|
| Basic Salary | Rs 10,00,000 | Rs 10,00,000 |
| HRA Received | Rs 5,00,000 | Rs 4,00,000 |
| Monthly Rent | Rs 35,000 (Rs 4.2L/yr) | Rs 30,000 (Rs 3.6L/yr) |
| Figure 1 — HRA received | Rs 5,00,000 | Rs 4,00,000 |
| Figure 2 — Rent minus 10% basic | Rs 4,20,000 – Rs 1,00,000 = Rs 3,20,000 | Rs 3,60,000 – Rs 1,00,000 = Rs 2,60,000 |
| Figure 3 — 50%/40% of basic | Rs 5,00,000 (50%) | Rs 4,00,000 (40%) |
| HRA Exempt (minimum) | Rs 3,20,000 | Rs 2,60,000 |
| Extra exemption in metro | +Rs 60,000 | — |
Landlord PAN Requirement — When and Why It Applies
Under Rule 26C of the Income Tax Rules, if an employee's annual rent payment exceeds Rs 1,00,000 (i.e., monthly rent exceeds Rs 8,333), the employee must provide the landlord's Permanent Account Number (PAN) to the employer when submitting rent receipts for HRA exemption. This threshold was introduced to ensure that landlords declare rental income in their own ITR.
If the landlord does not possess a PAN — which can happen with individual landlords who are below the filing threshold — the employee must obtain a written declaration from the landlord stating that they do not have a PAN. This declaration, typically in a prescribed format (or on plain paper with signature), is provided to the employer along with a Form 60. The employer must report the landlord's PAN (or Form 60 declaration) in their quarterly TDS return.
A common practical issue: tenants paying rent to elderly parents or non-tech-savvy landlords who are reluctant to share PAN. In such cases, the employer may disallow the HRA exemption in TDS computation even if the rent is genuine. However, the employee can still claim the exemption when filing the ITR directly — the income tax portal accepts the claim even without the employer's TDS adjustment, and the department may reconcile it during processing.
Monthly rent up to Rs 8,333
(Annual Rs 1L or below)
No PAN required. Rent receipts with landlord name, address, and your signature are sufficient. Employer processes HRA exemption based on receipts alone.
Monthly rent above Rs 8,333
(Annual above Rs 1L)
Landlord PAN is mandatory. Provide PAN copy with rent receipts to employer. If landlord has no PAN, provide signed Form 60 declaration from landlord.
Paying rent to parents
Allowed with conditions
Permitted if genuine. Use bank transfers, create a rent agreement, and ensure parents report rental income in their ITR. Rent to spouse is not accepted.
5 Common HRA Claim Mistakes That Lead to Tax Notices
Claiming HRA in the new tax regime
Consequence
Deduction disallowed during ITR processing; demand notice issued
Correct Approach
Switch to old tax regime via Form 10-IEA if HRA exemption is significant
Not providing landlord PAN for rent above Rs 1L/year
Consequence
Employer disallows exemption in TDS; may need to claim at ITR stage
Correct Approach
Obtain PAN from landlord, or landlord's Form 60 declaration if no PAN
Claiming HRA while living in own house
Consequence
Fraudulent claim — can attract penalty of 50–200% of tax evaded
Correct Approach
If you own and occupy a house, do not claim HRA. Claim Section 24(b) instead
Using wrong basic salary figure in HRA formula
Consequence
HRA calculation shows higher exemption than legally allowed
Correct Approach
Use only Basic + DA (where DA forms part of retirement benefit) in the formula. Do not include HRA, special allowance, or other components
Not keeping rent receipts for 7 years
Consequence
Cannot substantiate HRA claim during income tax scrutiny or notice
Correct Approach
Preserve monthly rent receipts, rent agreement, and bank transfer records for 7 years after the assessment year
How to Optimise Your HRA Exemption — Practical Tips
Negotiate HRA as 50% of Basic in Salary Structure
When negotiating CTC or joining a new company, request that HRA be set at 50% of basic salary (the maximum tax-efficient ratio). Companies often structure HRA at lower percentages — pushing to 50% of basic maximises the potential exemption under Figure 1.
Rent Should Exceed Basic Salary × 10% by Maximum Possible
Your exemption under Figure 2 is rent paid minus 10% of basic. If basic is Rs 7.5L, you pay Rs 75K as the mandatory 10% threshold before any benefit kicks in. Rent of Rs 2.88L gives Figure 2 of Rs 2.13L. Paying more rent (up to the Figure 1 or Figure 3 cap) directly increases exemption.
Pay Via Bank Transfer — Always
All rent payments should be via NEFT, IMPS, or cheque — never cash. Bank transfer records serve as independent evidence in addition to rent receipts. This is especially important if you claim HRA exemption while filing ITR directly, as the income tax portal may ask for supporting evidence during processing.
Include Notice Period and Vacant Month Correctly
If you vacated a rented property mid-year or moved to a new city, calculate HRA on a monthly basis. The exemption in months when you lived in rented accommodation is computed separately from months when you owned or had no HRA component. Form 12BB allows month-by-month HRA declaration.
Frequently Asked Questions
How is HRA exemption calculated under Section 10(13A)?
HRA exemption is the minimum of three figures: (1) Actual HRA received, (2) Rent paid minus 10% of basic salary, and (3) 50% of basic salary (metro cities: Mumbai, Delhi, Kolkata, Chennai) or 40% for non-metro cities. The lowest of these three is the exempt amount.
Is HRA exemption available in the new tax regime?
No. HRA exemption under Section 10(13A) is not available in the new tax regime. The entire HRA received is taxable. To claim HRA, you must opt for the old tax regime via Form 10-IEA before the July 31 ITR deadline.
What cities qualify as metro cities for HRA purposes?
Only four cities: Mumbai, Delhi (NCT), Kolkata, and Chennai. These get the 50% of basic salary cap (Rule 3). All other cities — including Bengaluru, Hyderabad, Pune, and Ahmedabad — use the 40% cap despite having high rental costs.
Is landlord PAN mandatory for HRA exemption?
Yes, if annual rent exceeds Rs 1,00,000. Provide landlord's PAN to your employer when submitting HRA proof. If landlord has no PAN, obtain their signed Form 60 declaration. Failure to provide PAN may result in the employer disallowing exemption in TDS.
Can I claim HRA if I live in my own house?
No. You cannot claim HRA exemption for a property you own and occupy. HRA exemption is only for genuine rented accommodation. If you own a property in another city and rent where you work, both HRA and home loan interest deductions can be claimed simultaneously.
Can I claim both HRA and home loan interest?
Yes, if you own a property in City A and live on rent in City B (a different city where you work), you can claim HRA exemption for rent paid in City B and home loan interest under Section 24(b) for the property in City A. Both are permissible simultaneously under the old regime.
Can I pay rent to my parents and claim HRA?
Yes, with conditions: the arrangement must be genuine, payments via bank transfer, a formal rent agreement in place, and your parents must report the rental income in their ITR as income from house property. Rent to spouse is not accepted by the income tax department.
How do I maximise my HRA exemption?
Maximise by: (a) ensuring HRA is 50% of basic in your salary structure, (b) paying rent in excess of 10% of basic salary to maximise Figure 2, (c) ensuring rent level approaches the Figure 3 cap without exceeding it unnecessarily, and (d) always paying rent via bank transfer and maintaining proper receipts. Use Oquilia's HRA calculator to test different scenarios.
Calculate your exact HRA exemption in seconds
Enter your basic salary, HRA received, monthly rent, and city — Oquilia's HRA calculator applies all three rules and tells you exactly how much is exempt, how much is taxable, and whether switching to the old regime is worth it for your situation.