HRA Exemption: How to Calculate It, Rules and Worked Examples (FY 2026-27)

The short answer

House Rent Allowance (HRA) is partly tax-free if you live in a rented home and pay rent. Under Section 10(13A) and Rule 2A, the exempt amount is the lowest of three figures:

1. The HRA you actually received from your employer.
2. Rent paid minus 10% of basic salary.
3. 50% of basic salary if you live in Delhi, Mumbai, Kolkata or Chennai, or 40% of basic anywhere else.

Whatever HRA is left over is taxable as salary. The exemption is available only under the old tax regime — under the new regime the whole HRA is taxable. To see whether claiming HRA actually makes the old regime cheaper for you, run your numbers through the new vs old regime income tax calculator.

The three-way formula, step by step

All three amounts are worked out for the same period — normally the full financial year, or month by month if your rent or salary changed during the year.

Basic salary here means basic pay plus dearness allowance (DA) if the DA counts for retirement benefits, plus any commission paid as a fixed percentage of turnover. Other allowances are not included.

Rent minus 10% of basic is the limb most people forget. If your rent is low compared with your salary, this figure can be small or even zero, and it then becomes your exemption no matter how much HRA your employer pays.

The 50% / 40% cap depends only on the city you actually live in, not where your employer is registered.

Limb	What it measures	Typical effect
HRA received	What your salary structure gives you	Binds when HRA is a small part of CTC
Rent − 10% of basic	How much rent you pay relative to pay	Binds when rent is low
50% / 40% of basic	A ceiling linked to basic pay	Binds when rent is very high

Worked examples

Each example uses annual figures for FY 2026-27 under the old regime.

Example	City	Basic / year	HRA received	Rent / year	Rent − 10% basic	50% / 40% of basic	Exempt HRA	Taxable HRA
A	Mumbai (metro)	₹4,80,000	₹2,40,000	₹3,60,000	₹3,12,000	₹2,40,000	₹2,40,000	₹0
B	Bengaluru (non-metro)	₹6,00,000	₹2,40,000	₹2,64,000	₹2,04,000	₹2,40,000	₹2,04,000	₹36,000
C	Pune (non-metro)	₹3,60,000	₹1,80,000	₹1,44,000	₹1,08,000	₹1,44,000	₹1,08,000	₹72,000
D	Delhi (metro)	₹12,00,000	₹6,00,000	₹4,80,000	₹3,60,000	₹6,00,000	₹3,60,000	₹2,40,000

In example A the HRA received and the 50% cap tie, so the full HRA is exempt. In example B rent minus 10% of basic is the lowest limb, so ₹36,000 of HRA is taxable even though the employee lives in a big city — Bengaluru is not a metro for HRA. In example C the rent is low relative to HRA. In example D a high earner pays moderate rent, so the rent limb caps the exemption at ₹3.6 lakh.

How much tax this saves depends on your slab. At the old regime's 30% slab plus 4% cess, ₹3,60,000 of exempt HRA saves about ₹1,12,320 a year; at the 20% slab it saves about ₹74,880.

Month-by-month: when rent or salary changes during the year

The formula works for any period, so when something changes mid-year you calculate each stretch separately and add the results. Say you lived in Pune from April to September and moved to Mumbai from October to March, with basic pay of ₹50,000 a month and HRA of ₹20,000 a month throughout:

Period	City	Months	Basic	HRA received	Rent paid	Rent − 10% basic	40% / 50% of basic	Exempt
Apr–Sep	Pune (40%)	6	₹3,00,000	₹1,20,000	₹96,000	₹66,000	₹1,20,000	₹66,000
Oct–Mar	Mumbai (50%)	6	₹3,00,000	₹1,20,000	₹2,10,000	₹1,80,000	₹1,50,000	₹1,20,000
Year		12		₹2,40,000				₹1,86,000

Working it out on annual totals instead would give a different, and wrong, answer, because the city limit and the rent changed partway through. Your employer normally does this split for you if you update your declaration when you move.

How salary structure changes your HRA

Because two of the three limbs depend on basic pay, the way your CTC is split matters. A higher basic raises the 50% / 40% cap but also raises the "10% of basic" that is subtracted from rent. A lower basic does the opposite. For someone paying moderate rent, a lower basic can increase the exemption; for someone paying very high rent in a metro, a higher basic can. Basic pay also drives your PF contribution and gratuity, so it is rarely worth restructuring salary for HRA alone. The CTC to in-hand calculator lets you change the basic percentage and see the effect on PF and take-home pay.

Where HRA appears in Form 16 and your return

Your employer reports the exempt HRA in Part B of Form 16 under allowances exempt under Section 10. In the ITR, the same figure goes in the salary schedule as an exempt allowance, so only the taxable balance of HRA is added to your income. If you claim HRA directly in the return because you missed the employer deadline, the gross salary in your return will be higher than the taxable salary in Form 16 — that is expected, but keep rent receipts and the landlord's PAN ready in case the Income Tax Department asks.

Notices most often follow large HRA claims with no PAN for the landlord, rent paid in cash to a relative who does not declare it, or claims for a city where the taxpayer also owns and lives in a house. Clean documentation avoids almost all of them.

Which cities count as metro?

For HRA only four cities use the 50% limit: Delhi, Mumbai, Kolkata and Chennai. Every other city — including Bengaluru, Hyderabad, Pune, Ahmedabad, Gurugram and Noida — uses 40%. This matters most for people in Bengaluru and Hyderabad with high rent, where the 40% cap often limits the exemption.

Documents and proofs

• Rent receipts or a rent agreement, submitted to your employer through Form 12BB so TDS is calculated correctly.
• Landlord's PAN if the annual rent is more than ₹1 lakh. If the landlord has no PAN, a signed declaration from the landlord is needed.
• Bank transfer records are the strongest evidence; large cash payments invite questions.
• If you missed the employer deadline, you can still claim the exemption in your income tax return — keep the same documents in case of a notice.

Common situations

Paying rent to parents. Allowed if a parent owns the property, you genuinely pay rent (preferably by bank transfer), and the parent declares it as rental income. Paying rent to a spouse is generally not accepted.

Owning a house and renting another. You can claim HRA for a rented home even if you own a house elsewhere — for example, you own a flat in your home town but work in another city. If you own a house in the same city and still rent, expect closer scrutiny and keep a clear reason (distance, size, family needs).

Changing city or rent mid-year. Calculate each period separately with the city and rent that applied, then add them up.

Living in your own home. No rent, so no HRA exemption; all HRA is taxable. Home-loan interest under Section 24(b) may help instead (old regime).

No HRA from your employer? Section 80GG

Self-employed people and employees whose salary has no HRA component can claim Section 80GG under the old regime. The deduction is the lowest of:

• ₹5,000 a month (₹60,000 a year),
• 25% of adjusted total income, and
• rent paid minus 10% of adjusted total income.

You must file Form 10BA, and you, your spouse or minor child cannot own a house in the city where you live and work.

Is HRA enough to choose the old regime?

Often not on its own. The new regime for FY 2026-27 makes taxable income up to ₹12 lakh tax-free and has lower slabs, so the old regime usually wins only when HRA is combined with the full ₹1.5 lakh under 80C, health insurance under 80D, NPS under 80CCD(1B) and home-loan interest. The income tax calculator shows the exact break-even amount of deductions for your salary, and our new tax regime guide explains the slabs and the ₹12 lakh rebate.

To see what your CTC turns into each month after PF, professional tax and income tax, use the CTC to in-hand calculator or browse in-hand salary for every CTC from 4 to 25 LPA.

Checklist before you declare HRA

• Confirm which regime you will use this year.
• Check the city type: only Delhi, Mumbai, Kolkata and Chennai are metro.
• Work out all three limbs; the lowest one is your exemption.
• Collect rent receipts and, if annual rent is above ₹1 lakh, the landlord's PAN.
• Pay rent by bank transfer where possible.
• Submit Form 12BB on time, or claim in your return if you miss it.