How HRA exemption is calculated

The least-of-three rule

House rent allowance (HRA) is part of many salaries. If you live in a rented home and pay rent, some or all of it can be tax-free. The rest is added to your taxable salary.

The tax-free part is not a fixed amount. You work out three figures for the year and take the lowest one:

• The HRA your employer actually paid you.
• The rent you paid, minus 10% of your salary.
• 50% of your salary if you live in one of 8 big cities, or 40% anywhere else.

Whatever is left of your HRA after this is taxed like the rest of your pay. If you pay no rent, the second figure is zero, so all of your HRA is taxable.

Why the lowest amount

Each limit stops a different kind of over-claim. You can't exempt more HRA than you received. You can't exempt rent you never paid. And the city limit caps the claim at a share of your pay. Usually one of the three is clearly lower than the others, and that one decides your answer. The HRA exemption calculator works out all three for you.

Under the Income-tax Act, 2025, the HRA exemption sits in Schedule III (serial 11), and the limits are in Rule 279 of the Income-tax Rules, 2026. That replaced the old Rule 2A.

What counts as "salary" (basic + DA)

For HRA, "salary" is narrower than your total pay. It means your basic pay plus dearness allowance (DA). It does not include HRA itself, special allowance, bonus or other allowances.

This matters twice. Both the 10% deduction from rent and the 40% or 50% city limit use this smaller salary figure. So if your basic pay is a small share of your package, your HRA exemption is usually smaller too.

A quick check on your payslip

• Find "Basic" and "DA" (many private employers pay no DA). Add them for the year.
• Find "HRA" and add it up for the year.
• Add up the rent you paid in the same months.

Use those three numbers in the rule above. Your employer usually does this sum for TDS, once you share your rent details.

The 8 metro cities from tax year 2026-27

Until FY 2025-26, the old Rule 2A gave the 50% limit to only four cities: Mumbai, Delhi, Kolkata and Chennai. Everyone else got 40%.

From tax year 2026-27, Rule 279 lists 8 cities at 50%. Four are new: Bengaluru, Hyderabad, Pune and Ahmedabad. If you rent in one of those four, your third limit is now 50% of salary instead of 40%.

The higher limit only helps when the city limit is the lowest of your three amounts. If your rent is low, the rent figure may be lower still, and the change makes no difference.

Worked example: Bengaluru at 40% and 50%

Meera rents a flat in Bengaluru. Her basic pay plus DA is ₹6,00,000 a year. She gets ₹3,00,000 HRA and pays ₹28,000 a month rent, which is ₹3,36,000 a year.

How we worked this out: we ran Meera's figures through the same HRA module our HRA exemption calculator uses, once with the 40% limit and once with 50%. Rent minus 10% of salary is ₹3,36,000 − ₹60,000.

Tax-free HRA at 40%

₹2,40,000

Tax-free HRA at 50%

₹2,76,000

Old-regime tax saved

₹11,232

Extra tax-free HRA

₹36,000

Under the old 40% limit, the city limit was the lowest figure. Now the rent figure is lowest, so ₹36,000 more of her HRA could be tax-free.

What it does to her tax

Say Meera's total salary is ₹15,00,000 a year and she puts ₹1,50,000 in tax-saving investments (old section 80C, now section 123). In the old regime, her estimated tax including 4% cess falls from ₹1,35,720 to ₹1,24,488. That is ₹11,232 less, because the extra ₹36,000 was taxed at 30% plus cess.

How we worked this out: old-regime tax from our income tax calculator module, with the ₹50,000 standard deduction, ₹1,50,000 in tax-saving investments and HRA of ₹2,40,000 or ₹2,76,000. No other deductions.

Rent paid to parents

Many people live in a home owned by a parent and pay them rent. There is no specific rule in the Act for this case. In practice, it is usually allowed if:

• the parent owns the house,
• the rent is real and paid traceably, such as by bank transfer, and
• the parent shows the rent as income in their own tax return.

Treat this as a common practice, not a guarantee. Keep a rent agreement and bank records. If in doubt, check with a CA.

Proof: rent receipts and landlord PAN

You claim HRA through your employer, who uses it to work out TDS on your salary. Employers ask for proof using Form 12BB.

1. Give your employer your rent details: the rented address, the rent you pay and your landlord's name.
2. Share rent receipts or a rent agreement when your employer asks for proof, usually near the end of the year.
3. If the rent you pay is more than ₹1 lakh a year, give your employer your landlord's PAN in Form 12BB.

Keep copies of receipts, the agreement and bank records of payment for a few years. They help if the Income Tax Department asks questions later.

HRA and the new regime

HRA exemption is an old-regime benefit. In the new regime (section 202, the default), HRA is fully taxable. The new regime gives you a ₹75,000 standard deduction and lower slab rates instead.

So a bigger HRA exemption only helps if the old regime works out cheaper for you overall. In Meera's case it doesn't. Her new-regime tax on ₹15,00,000 is an estimated ₹97,500, still below her ₹1,24,488 in the old regime even with the 50% limit.

People with high rent, a home loan and full tax-saving investments are more likely to find the old regime cheaper. Run both in the income tax calculator before you tell your employer which regime to use for TDS.

Sources

• Income Tax Department: Rule 279 (HRA limits and the 8 cities)
• Income Tax Department: Section 202 (new tax regime)
• Income Tax Department: Section 19 (standard deduction)
• Income Tax Department: Section 123 (tax-saving investments)
• Union Budget 2026: Memorandum explaining the Finance Bill

By the OnlineCalculator.pro team. Checked against the sources above on 15 October 2026.

For education only, not tax advice. Based on rules for FY 2026-27. Check with a CA or the Income Tax Department before you file.