House Rent Allowance (HRA) is a salary component that can be partly exempt from tax if you actually pay rent. The exemption is the least of three amounts – your actual HRA, rent paid minus 10% of salary, or 50% of salary in a metro (40% elsewhere) – and for FY 2026-27 it is available only under the old tax regime. Only that smallest figure escapes tax; the balance of your HRA is taxed like any other salary.
The number most people get wrong is not the HRA itself. It is which of the three legs actually binds, and that is rarely the one they expect.
The three-part HRA formula – the least is exempt
What is HRA, and when is it exempt?
HRA is an allowance many employers pay to help cover the cost of rented accommodation. It becomes partly tax-free under Section 10(13A) of the Income Tax Act, but only when three conditions hold: HRA is part of your salary structure, you live in rented accommodation, and you actually pay that rent.
If you own the home you live in, or you pay no rent, there is nothing to exempt – the full HRA is taxable. "Salary" in this formula has a specific meaning: basic salary plus dearness allowance, plus commission if it is a fixed percentage of turnover. Ordinary allowances and bonuses are left out.
How is HRA exemption calculated?
You compute all three legs and take the smallest. Consider an illustrative case: a salaried person in Mumbai with a basic salary of ₹50,000 a month (₹6,00,000 a year), HRA of ₹25,000 a month (₹3,00,000 a year), paying rent of ₹20,000 a month (₹2,40,000 a year).
| Leg of the formula | Working | Amount (illustrative) |
|---|---|---|
| Actual HRA received | – | ₹3,00,000 |
| Rent paid − 10% of salary | ₹2,40,000 − ₹60,000 | ₹1,80,000 |
| 50% of salary (metro) | 50% of ₹6,00,000 | ₹3,00,000 |
| Exempt (least of three) | ₹1,80,000 |
Here the exempt amount is ₹1,80,000, set by the rent-minus-10% leg. The remaining ₹1,20,000 of HRA (₹3,00,000 − ₹1,80,000) is taxable. Change any input – higher rent, a non-metro city, a different basic – and a different leg can bind. The figures above are illustrative; your own numbers decide the result, and the HRA calculator does the arithmetic for you.
Which cities count as metro for HRA?
For HRA, only four cities are treated as metros: Delhi, Mumbai, Kolkata and Chennai. These use the 50% of salary limit. Every other city, including Bengaluru, Hyderabad, Pune and Ahmedabad, uses 40%. This is one of the most common errors – people assume any big city qualifies for 50%, which quietly inflates the exemption they claim.
What if you pay rent to your parents?
Rent paid to a parent can qualify, provided the arrangement is genuine. That means the money actually moves, ideally by bank transfer, and your parents declare it as rental income in their own tax return. A rent agreement and payment records support the claim.
What does not work: claiming HRA on a house you or your spouse own and live in, or showing rent on paper without any real payment. These are the arrangements tax authorities scrutinise.
What documents do you need for HRA?
The claim rests on proof that rent was actually paid. In practice that means rent receipts, and often a rent agreement, kept for your own records and for your employer's payroll process. Where the total rent for the year crosses ₹1 lakh, your landlord's PAN is generally required; where the landlord has no PAN, a signed declaration is usually asked for instead. Paying rent by bank transfer rather than cash leaves a clean trail if the claim is ever questioned. Exact documentation norms vary by employer and can change, so follow your current payroll instructions.
Why HRA disappears under the new regime
The HRA exemption lives entirely in the old tax regime. The new regime – the default from FY 2023-24 – trades away HRA, Section 80C, and most other exemptions in return for lower slab rates. Under it, your HRA is fully taxable, so the least-of-three calculation simply does not apply.
That is the real decision behind HRA. It is not "how do I maximise my exemption", but which regime you are in – and that comparison depends on your whole income and deduction picture, not HRA alone.
Related NYVO guides
- Old vs New Tax Regime: How They Differ – the regime choice that decides whether HRA is exempt at all.
- Income Tax Slabs in India – the slab structures behind that regime choice.
- Section 80C: The ₹1.5 Lakh Deduction Explained – the other big old-regime deduction that sits alongside HRA.
HRA is not a discount on your rent. It is a formula, and the smallest of its three legs is all that ever escapes tax. Knowing which leg binds tells you what your exemption is really worth.
