HRA Exemption: Rules, Formula & Examples (2026)
House Rent Allowance is one of the single largest tax deductions available to a salaried employee, and unlike 80C there is no Rs. 1.5 lakh cap. For a metro-based professional paying realistic rent, HRA exemption alone can save Rs. 40,000-80,000 in tax every year. This guide explains exactly how the exemption is calculated, when metro rules kick in, what documents your employer (and the tax department) actually need, and the three situations where HRA claims fail during scrutiny.
Who can claim HRA exemption
HRA exemption under Section 10(13A) is available to salaried individuals who:
- Receive HRA as a component of salary
- Actually pay rent for accommodation they occupy
- Are not paying rent to a spouse, and
- Opt for the Old Tax Regime when filing
Self-employed individuals cannot claim HRA — they get a separate but smaller deduction under Section 80GG. Under the New Tax Regime, HRA exemption is disallowed entirely; this is the single biggest reason metro-based salaried employees stay on the Old Regime.
The HRA formula
HRA exemption is the least of three values:
- Actual HRA received from the employer
- Rent paid minus 10% of Basic + DA
- 50% of Basic + DA (for metro cities: Delhi, Mumbai, Chennai, Kolkata) or 40% (non-metros)
Whichever of the three numbers is smallest becomes your exempt HRA. The remaining HRA is taxable.
Metro vs non-metro: which cities qualify?
For HRA purposes, only four cities are considered metros: Delhi, Mumbai, Chennai, and Kolkata. Bengaluru, Hyderabad, Pune, Ahmedabad, and every other large Indian city use the 40% non-metro rate even though they are metropolitan in every other sense.
The metro-suburbs quirk: If your office is in Mumbai but you live in Thane or Navi Mumbai, you can still use the 50% metro rate because Thane/Navi Mumbai are part of the Greater Mumbai urban agglomeration for HRA. Ask your tax team in writing — this saved one of our readers Rs. 22,000/year.
Documents you need
- Rent receipts signed by the landlord, for every month HRA is claimed
- Rental agreement — mandatory if annual rent exceeds Rs. 1 lakh
- Landlord's PAN — mandatory if annual rent exceeds Rs. 1 lakh (Circular 8/2013)
- Declaration from landlord if landlord does not have a PAN
- Bank transfer records — strongly recommended; cash rent payments have been disallowed in several scrutiny cases
Warning: Paying rent to parents or siblings is legal and the exemption works, but the recipient must show this as rental income on their own ITR. Fake rent receipts to parents who do not declare the income are the #1 trigger for HRA scrutiny notices.
Worked example: Bengaluru professional
Rahul works in Bengaluru with Basic + DA of Rs. 50,000/month (Rs. 6 lakh/year). He receives HRA of Rs. 25,000/month (Rs. 3 lakh/year) and pays actual rent of Rs. 22,000/month (Rs. 2.64 lakh/year).
| Part of formula | Value |
|---|---|
| Actual HRA received | Rs. 3,00,000 |
| Rent − 10% of Basic (2,64,000 − 60,000) | Rs. 2,04,000 |
| 40% of Basic (non-metro) | Rs. 2,40,000 |
| Exempt HRA (least) | Rs. 2,04,000 |
| Taxable HRA | Rs. 96,000 |
Rahul's tax saving on the Rs. 2,04,000 exemption at a 30% slab is roughly Rs. 63,500 per year — more than the savings from a full Rs. 1.5 lakh 80C investment.
Common reasons HRA claims get rejected
- Rent paid to self. You cannot claim HRA for a house you own or one owned by your spouse.
- No landlord PAN for rent above Rs. 1 lakh/year. Employers refuse the exemption in December investment proofs; you can still claim during ITR filing if you obtain it retroactively.
- Claiming HRA and home loan together for the same city. It is possible (e.g., if your family lives in a self-owned home while you rent in another city for work), but it attracts scrutiny.
- Paying rent in cash without receipts. Particularly risky for amounts above Rs. 50,000/month due to TDS obligations on the payer.
HRA plus home loan
Contrary to popular belief, HRA and home loan deductions can coexist. If you own a house in Pune but have been posted to Bengaluru by your employer, you can claim HRA for the rented Bengaluru flat and Section 24(b) interest deduction on the Pune home loan simultaneously. Keep clean documentation: rental agreement in Bengaluru, Pune property address in the home loan, and a factual note in your tax declaration.
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Primary sources used to write and fact-check this guide. Updated when official notifications change.
Last reviewed by the AboutAll.in editorial team in April 2026. See our methodology for the full research process.
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