How HRA exemption works
House Rent Allowance (HRA) is a salary component paid by employers to help with rent costs. It\'s partially tax-exempt under Section 10(13A) of the Income Tax Act — but only under the old tax regime. The new regime doesn\'t allow HRA exemption.
The Income Tax Act prescribes a "min-of-three" rule for the exemption. You can only claim the smallest of:
- The actual HRA received from your employer.
- Rent paid minus 10% of basic salary (a self-funding floor — the law assumes the first 10% of rent comes from your own pocket).
- 50% of basic salary if you live in a "metro" city (Delhi, Mumbai, Kolkata, or Chennai) — otherwise 40%.
Worked example
Suppose Priya earns ₹50,000 basic + ₹25,000 HRA per month, pays ₹30,000 rent in Bengaluru, and follows the old regime:
- Annual basic: ₹6,00,000. Annual HRA received: ₹3,00,000. Annual rent: ₹3,60,000.
- Component 1 (HRA received): ₹3,00,000
- Component 2 (rent − 10% basic): ₹3,60,000 − ₹60,000 = ₹3,00,000
- Component 3 (40% basic, non-metro): ₹2,40,000
The minimum is ₹2,40,000 — that\'s the exempt HRA. The remaining ₹60,000 (₹3,00,000 received − ₹2,40,000 exempt) is taxable.
How to maximise your HRA exemption
- Match HRA to rent: if your employer pays you more HRA than you actually need for rent, the excess is taxable. Conversely, getting a higher HRA component in your CTC structure helps when your rent is high.
- Higher basic helps the 50%/40% cap but increases the 10% deduction in component 2. The math usually still favours higher basic when your rent is well above 10% of basic.
- Live in a metro city for the 50% cap instead of 40%. (Only matters if component 3 is your binding constraint — check the highlighted row in the calculator above.)
- Keep clean rent receipts with landlord PAN if annual rent ≥ ₹1,00,000. This is the most common reason HRA claims get rejected in assessment.
Where HRA fits in your overall tax
HRA exemption is one input to your overall income tax calculation under the old regime. After computing your exempt HRA here, subtract it from your gross salary before applying slab rates. The old vs new regime decision often hinges on how much HRA + 80C + home loan interest you can claim — at higher totals, the old regime usually wins despite higher slab rates.
FY 2025-26 (AY 2026-27) — what changed?
The HRA exemption rules under Section 10(13A) are unchanged by the Union Budget — the formula has been stable since the 1980s. What changes year-to-year is the slab rates and the standard deduction, both of which affect how valuable your HRA exemption is.
Sources
- Income Tax Act, 1961 — Section 10(13A) (Income Tax Department of India): the statutory authority for the HRA exemption.
- Income Tax e-Filing portal — HRA deduction guide: official CBDT taxpayer guidance on documentation and computation.
- CBDT Notification on metro classification (Delhi, Mumbai, Kolkata, Chennai) for the 50% / 40% cap rule.
Calculator is provided for estimation only and does not constitute tax advice. Consult a chartered accountant or the Income Tax e-Filing portal for filing.
Related tools
- Income Tax Calculator — compare old vs new regime once you know your HRA exemption.
- GST Calculator — for business and freelance income.
- EMI Calculator — if your housing plan involves a home loan instead of (or after) rent.