House Rent Allowance (HRA) is one of the most valuable components of a salaried employee's salary package in India. It helps cover the high costs of renting a home, especially in urban areas where property prices and rents are skyrocketing. But did you know that a significant portion of your HRA can be completely exempt from income tax? Yes, under Section 10(13A) of the Income Tax Act, 1961, read with Rule 2A, you can claim HRA exemption and reduce your taxable income substantially.
For the Financial Year 2025-26 (Assessment Year 2026-27), the rules for HRA exemption remain largely unchanged from previous years. This exemption is available only if you opt for the old tax regime. In the new tax regime (default from FY 2023-24), no HRA exemption is allowed – the entire HRA received becomes taxable.
If you're living in a rented house and receiving HRA from your employer, understanding how to calculate this exemption can save you thousands in taxes every year. In this comprehensive guide, we'll break down the eligibility, calculation formula, step-by-step process, real-life examples, and essential tips to maximize your claim.
What is House Rent Allowance (HRA)?
HRA is an allowance provided by employers to employees to meet expenses related to rented accommodation. It's typically a percentage of your basic salary (often 40-50% in metro cities). While the full HRA amount is added to your salary, a part of it can be claimed as exempt from tax if you actually pay rent.
Key Points:
- HRA is part of your CTC (Cost to Company).
- Exemption is available only for actual rent paid.
- You cannot claim HRA if you live in your own house (even if you have a home loan).
- Self-employed individuals cannot claim HRA exemption but can opt for deduction under Section 80GG (with lower limits).
Eligibility Criteria for HRA Exemption
To claim HRA exemption under Section 10(13A):
- You must be a salaried employee receiving HRA as part of your salary.
- You must live in rented accommodation and pay rent.
- The rent must be paid to someone other than your spouse (rent to parents is allowed with proper proof).
- Opt for the old tax regime while filing ITR.
Metro vs Non-Metro Cities:
- Metro cities (for 50% exemption cap): Delhi, Mumbai, Kolkata, Chennai.
- Non-metro cities (40% cap): All other cities, including Bengaluru, Hyderabad, Pune, Ahmedabad, etc.
This classification hasn't changed in FY 2025-26.
How to Calculate HRA Exemption: The Formula
The exempt HRA is the least (minimum) of the following three amounts:
- Actual HRA received from your employer during the year.
- Actual rent paid minus 10% of (Basic Salary + Dearness Allowance).
- "Salary" here includes Basic + DA (if DA forms part of retirement benefits) + Commission (if based on fixed percentage of turnover).
- 50% of (Basic + DA) if living in a metro city, or 40% if in a non-metro city.
The remaining HRA (after exemption) is added to your taxable salary.
Note: Calculations are done on an annual basis. If your salary or rent changes mid-year, prorate accordingly.
Step-by-Step Guide to Calculate HRA Exemption
- Gather your details:
- Annual Basic Salary
- Annual Dearness Allowance (DA, if applicable)
- Annual HRA received
- Annual Rent paid
- City of residence (metro or non-metro)
- Calculate 10% of Salary: (Basic + DA) × 10%
- Calculate excess rent: Actual Rent Paid – 10% of Salary
- Calculate city-based limit: 50% or 40% of (Basic + DA)
- Take the minimum of:
- Actual HRA received
- Excess rent
- City-based limit
This minimum amount is your tax-exempt HRA.
Detailed Examples of HRA Exemption Calculation
Let's understand with practical examples for FY 2025-26.
Example 1: Employee in Metro City (Mumbai)
Mr. Rajesh lives in Mumbai (metro city) and pays high rent due to the city's expensive real estate.
- Monthly Basic Salary: ₹50,000 (Annual: ₹6,00,000)
- Monthly DA: ₹10,000 (forms part of retirement benefits; Annual: ₹1,20,000)
- Monthly HRA Received: ₹25,000 (Annual: ₹3,00,000)
- Monthly Rent Paid: ₹30,000 (Annual: ₹3,60,000)
Step 1: Salary for HRA = Basic + DA = ₹7,20,000
Step 2: 10% of Salary = ₹72,000
Step 3: Actual Rent Paid minus 10% of Salary = ₹3,60,000 – ₹72,000 = ₹2,88,000
Step 4: 50% of Salary (metro) = ₹3,60,000
Step 5: Least of:
- Actual HRA: ₹3,00,000
- Excess Rent: ₹2,88,000
- 50% Salary: ₹3,60,000
Exempt HRA: ₹2,88,000
Taxable HRA: ₹3,00,000 – ₹2,88,000 = ₹12,000
Rajesh saves tax on ₹2,88,000 – a significant amount depending on his tax slab.
Example 2: Employee in Non-Metro City (Pune)
Ms. Priya lives in Pune (non-metro).
- Monthly Basic: ₹40,000 (Annual: ₹4,80,000)
- DA: Nil
- Monthly HRA: ₹18,000 (Annual: ₹2,16,000)
- Monthly Rent: ₹20,000 (Annual: ₹2,40,000)
Salary for HRA: ₹4,80,000
10% of Salary: ₹48,000
Excess Rent: ₹2,40,000 – ₹48,000 = ₹1,92,000
40% of Salary (non-metro): ₹1,92,000
Least of:
- HRA Received: ₹2,16,000
- Excess Rent: ₹1,92,000
- 40% Salary: ₹1,92,000
Exempt HRA: ₹1,92,000
Taxable HRA: ₹24,000
Notice how the non-metro cap limits the exemption compared to a similar case in a metro city.
Example 3: Low Rent Scenario (No DA, Bangalore - Non-Metro)
Mr. Amit in Bengaluru pays low rent.
- Annual Basic: ₹8,00,000
- DA: Nil
- HRA Received: ₹4,00,000
- Rent Paid: ₹1,20,000 (₹10,000/month)
10% Salary: ₹80,000
Excess Rent: ₹1,20,000 – ₹80,000 = ₹40,000
40% Salary: ₹3,20,000
Least of: ₹4,00,000, ₹40,000, ₹3,20,000 = ₹40,000
Only ₹40,000 exempt because rent is not much higher than 10% of salary.
Example 4: Rent to Parents
You can pay rent to parents and claim HRA. Ensure:
- Actual transfer of money (bank proof).
- Parents declare rental income in their ITR.
Calculation remains the same.
Documents Required to Claim HRA Exemption
To avoid rejection:
- Rent Receipts: Mandatory if rent > ₹3,000/month. Include landlord's signature, revenue stamp (if cash > ₹5,000).
- Rent Agreement: Preferably registered.
- Landlord's PAN: Mandatory if annual rent > ₹1,00,000. If landlord has no PAN, get a declaration.
- Proof of Payment: Bank statements/UPI for online transfers.
Submit to employer for TDS adjustment, or claim while filing ITR (even if not submitted earlier).
Common Mistakes to Avoid
- Claiming HRA while living in own house.
- Forgetting to submit proofs to employer.
- Not reporting landlord PAN when required.
- Opting new regime and expecting exemption.
- Fake receipts – can lead to penalties.
How Employers Handle HRA
Employers deduct TDS after considering HRA exemption (based on proofs submitted). If not submitted, full HRA is taxed – claim refund via ITR.
Tax Savings Impact
Assuming 30% tax slab + cess:
- ₹2,00,000 exemption saves ~₹62,400 in tax.
Use online HRA calculators on Income Tax portal or sites like ClearTax for quick estimates.
Conclusion
Calculating HRA exemption is straightforward once you know the three-condition rule. For FY 2025-26, focus on accurate proofs and old regime to maximize benefits. With rising rents, this exemption is a lifeline for salaried individuals.
Always consult a tax professional for complex cases (e.g., mid-year job change, multiple cities). Stay compliant to avoid notices.
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