What is HRA (House Rent Allowance)?

House Rent Allowance (HRA) is a salary component provided by employers to employees to help them meet rental accommodation expenses. Under Section 10(13A) of the Income Tax Act, 1961, a portion of HRA received is exempt from income tax, making it one of the most popular tax-saving components for salaried individuals living in rented houses.

💡 Key Benefit

HRA exemption can save you thousands of rupees in taxes annually. For someone paying ₹20,000 rent monthly with a ₹50,000 basic salary, the annual tax saving can be approximately ₹54,000 (in the 30% tax bracket).

Who Can Claim HRA Exemption?

To claim HRA exemption, you must meet ALL of the following conditions:

  • You are a Salaried Employee: HRA is applicable only for salaried individuals. Self-employed persons cannot claim HRA but may be eligible for Section 80GG deduction.
  • You Receive HRA as Part of Salary: Your salary structure must include an HRA component. Check your salary slip or offer letter to confirm.
  • You Live in Rented Accommodation: You must be paying rent for your residence. Cannot claim if living in own property or property owned by spouse.
  • You Choose Old Tax Regime: HRA exemption is only available under the old tax regime, not the new regime introduced from FY 2020-21.

How is HRA Exemption Calculated?

The HRA exemption is not the full amount you receive as HRA. Instead, it's calculated as the minimum of three amounts:

The Three Conditions

  • Condition 1 - Actual HRA Received: The HRA amount shown in your salary slip (annually)
  • Condition 2 - Rent Minus 10% of Basic: Formula: (Annual Rent Paid) - (10% × Annual Basic Salary + DA)
  • Condition 3 - Percentage of Basic Salary: 50% for metro cities (Delhi, Mumbai, Kolkata, Chennai) or 40% for all other non-metro cities

Important Note:

HRA exemption is the MINIMUM of these three amounts, not the maximum! The tax department will automatically select whichever amount is lowest.

Real-Life Calculation Example

Scenario: Software Engineer in Bangalore

City: Bangalore (Non-Metro)

Parameter Monthly Annual
Basic Salary ₹60,000 ₹7,20,000
HRA Received ₹30,000 ₹3,60,000
Actual Rent Paid ₹25,000 ₹3,00,000

Step-by-Step Calculation:

Condition Calculation Amount
1. Actual HRA Received HRA component from salary ₹3,60,000
2. Rent - 10% of Basic ₹3,00,000 - (10% × ₹7,20,000)
= ₹3,00,000 - ₹72,000		 ₹2,28,000
3. 40% of Basic (Non-Metro) 40% × ₹7,20,000 ₹2,88,000
HRA Exemption Minimum of above 3 conditions ₹2,28,000

Tax Impact

Taxable HRA: ₹3,60,000 - ₹2,28,000 = ₹1,32,000

Estimated Tax Saving (30% bracket): ₹2,28,000 × 30% = ₹68,400 per year!

Metro vs Non-Metro Cities: What's the Difference?

🏙️ Metro Cities (50% of Basic)

Only FOUR cities are considered metro for HRA purposes:

  • Delhi
  • Mumbai
  • Kolkata
  • Chennai

Note: Even cities like Bangalore, Hyderabad, Pune are treated as non-metro for HRA calculation.

🏘️ Non-Metro Cities (40% of Basic)

All other cities and towns in India, including:

  • Bangalore
  • Hyderabad
  • Pune
  • Ahmedabad
  • All Tier 2 and Tier 3 cities

💡 Impact on Your Exemption

For someone with ₹50,000 basic salary (₹6,00,000/year):

  • Metro City: Maximum exemption limit = ₹3,00,000 (50%)
  • Non-Metro: Maximum exemption limit = ₹2,40,000 (40%)
  • Difference: ₹60,000 higher potential exemption in metro cities

Documents Required to Claim HRA

For Annual Rent up to ₹1 Lakh

  • Rent Receipts: Monthly or quarterly receipts from landlord
  • Declaration Form: Submit to employer at year beginning
  • Proof of Payment: Bank statements (recommended but not mandatory)

For Annual Rent Exceeding ₹1 Lakh

  • Landlord's PAN Card: Mandatory requirement
  • Rent Agreement: Signed rental agreement (registered/notarized preferred)
  • Rent Receipts: On stamp paper with revenue stamps
  • Payment Proof: Bank transfer statements strongly recommended
  • Landlord Details: Full name, address, and contact information

⚠️ Important PAN Rule

If your annual rent exceeds ₹1 lakh (₹8,334 per month), providing landlord's PAN is mandatory. Without it, you may not be able to claim HRA exemption beyond ₹1 lakh.

Special Cases and Common Scenarios

Can I Pay Rent to My Parents?

Yes! You can pay rent to your parents and claim HRA exemption. Requirements:

  • Create a proper rent agreement
  • Pay rent through bank transfer (avoid cash)
  • Your parents must declare this as "Income from House Property"
  • They can claim standard deduction (30%) and other expenses
  • Net tax impact on family is usually positive

Note: Cannot pay rent to spouse (clubbing provisions apply)

Living in Own House?

No HRA exemption allowed. However:

  • You can claim home loan interest deduction (Section 24b) up to ₹2 lakhs for self-occupied property
  • Principal repayment under Section 80C (up to ₹1.5 lakhs)
  • Consider if home loan benefits outweigh HRA for your situation

Living in Two Different Cities During the Year?

Yes, you can claim for both periods!

  • Calculate HRA separately for each city and period
  • Use metro/non-metro rate based on actual city of residence
  • Keep separate rent receipts for each location
  • Common for job transfers or relocations

Employer Doesn't Provide HRA?

Claim Section 80GG deduction instead!

  • Available for salaried/self-employed not receiving HRA
  • Maximum deduction: ₹5,000 per month (₹60,000/year)
  • Calculate as least of: (a) ₹5,000/month, (b) 25% of total income, (c) Rent - 10% of income
  • Cannot own residential property in city where employed
  • Only available under old tax regime

HRA and Tax Regime Choice

⚠️ Critical Decision: Old vs New Tax Regime

HRA exemption is NOT available under the new tax regime.

If you want to claim HRA exemption, you MUST choose the old tax regime.

When Should You Choose Old Regime for HRA?

✓ Choose OLD Regime If:

  • Your HRA exemption is substantial (₹1.5+ lakhs annually)
  • You have other deductions: 80C, 80D, home loan interest
  • Combined deductions exceed ₹2.5-3 lakhs
  • You're paying high rent in expensive cities

⚠️ Consider NEW Regime If:

  • Your HRA exemption is minimal (below ₹1 lakh)
  • You don't have investments in 80C
  • Lower tax rates compensate for loss of deductions
  • You prefer simplicity over claiming deductions

💡 Pro Tip: Use our Income Tax Calculator to compare both regimes with your actual figures before deciding!

Common HRA Mistakes to Avoid

Mistakes to Watch Out For

  • Claiming Full HRA Received: Many people think entire HRA is exempt. Wrong! Only the calculated exemption amount (minimum of 3 conditions) is tax-free.
  • Not Providing Landlord's PAN: If rent exceeds ₹1 lakh/year, PAN is mandatory. Missing PAN = exemption limited to ₹1 lakh only.
  • Cash Payments Without Proof: Always pay rent through bank. Cash payments are difficult to prove if questioned by tax authorities.
  • Using Incorrect Metro/Non-Metro Rate: Remember: Only Delhi, Mumbai, Kolkata, Chennai are metro. Bangalore, Pune = Non-metro!
  • Claiming HRA While Living in Own Property: You cannot claim HRA for property owned by you or your spouse, even if you have rent receipts.
  • Not Updating Employer About Rent Changes: If your rent increases/decreases, inform employer immediately to adjust TDS correctly.

How to Maximize Your HRA Benefits

Tips to Maximize HRA Benefits

1. Negotiate Higher HRA in Salary Structure

When joining or during salary revision, request higher HRA component. It's completely tax-exempt (up to limits), unlike basic salary which is fully taxable. Ideal: HRA = 50-60% of basic salary.

2. Pay Rent to Parents

If living with parents, create rent agreement and pay them. Parents declare as income, claim 30% standard deduction + property tax. Net family tax savings are significant.

3. Keep All Documentation Ready

Maintain rent receipts, agreements, and payment proof meticulously. Submit to employer at year start for correct TDS deduction throughout the year.

4. Compare Tax Regimes Annually

Tax laws change. Every year, calculate tax under both regimes. Choose old regime only if HRA + other deductions provide real savings.

5. Time Your Job Relocation

If moving from non-metro to metro city, your HRA exemption limit increases from 40% to 50%. Plan moves considering tax year for maximum benefit.

Ready to Calculate Your HRA Exemption?

Use our free calculator to find your estimated HRA tax exemption

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Quick Reference Guide

Aspect Details
Legal Section Section 10(13A) of Income Tax Act
Applicable To Salaried employees only (old tax regime)
Metro Cities Delhi, Mumbai, Kolkata, Chennai (50%)
Non-Metro Cities All other cities (40%)
PAN Required When annual rent exceeds ₹1,00,000
Alternative Section 80GG (max ₹5,000/month)
Basic Salary Includes Basic + DA (if part of retirement benefits)
New Tax Regime HRA exemption NOT available
Disclaimer: This guide is for educational purposes only. HRA rules, tax laws, and exemption calculations may change. Individual circumstances vary significantly. For accurate tax planning and to ensure compliance with current Income Tax Act provisions, please consult with a qualified Chartered Accountant or tax advisor. The information provided here is based on commonly applicable rules as of January 2026.