HRA Exemption Guide AY 2026-27

What HRA exemption actually is

House Rent Allowance (HRA) is a component of your salary meant to cover rent. Under Section 10(13A), part of it is exempt from tax if you actually pay rent, which is why it is one of the most valuable exemptions available to salaried tenants, and only available under the old tax regime.

The catch that surprises people: the exempt amount is not your full HRA. It is the lowest of three figures, so the actual benefit depends on your salary, your rent, and your city. Use our HRA Calculator to see your number instantly, then read on to understand how it is derived and how to keep the claim audit-proof.

Because HRA sits inside the old regime, the decision to claim it is really part of a bigger choice: old regime with exemptions, or new regime with lower slab rates and almost no deductions. If HRA is a large part of your package, it often tips the balance toward the old regime, but only the maths tells you for sure, which is why this guide ends by tying HRA back to your regime decision.

The three-part calculation

Your HRA exemption is the least of these three amounts:

1. The actual HRA received from your employer during the year.
2. Rent paid minus 10% of salary (salary here means basic + dearness allowance).
3. 50% of salary if you live in a metro (Delhi, Mumbai, Kolkata, Chennai), or 40% for non-metros.

Whichever of these three is smallest is your exempt HRA; the rest is taxable. Because rent-minus-10% and the 40/50% cap both move with your salary, high earners in low-rent situations often find their exemption capped well below their actual HRA.

A worked example

Ravi works in Mumbai (a metro), earns a basic salary of ₹6,00,000, receives HRA of ₹2,40,000, and pays rent of ₹3,00,000 a year. The three figures are: (1) actual HRA ₹2,40,000; (2) rent minus 10% of salary = ₹3,00,000 − ₹60,000 = ₹2,40,000; (3) 50% of salary = ₹3,00,000. The least is ₹2,40,000, so his entire HRA is exempt.

Now change one fact: if Ravi paid only ₹1,50,000 rent, figure (2) becomes ₹1,50,000 − ₹60,000 = ₹90,000, which is now the lowest, so only ₹90,000 is exempt and ₹1,50,000 of his HRA becomes taxable. Same salary, very different outcome.

One more variation shows why the city matters: if Ravi did the same job in Nagpur (non-metro) with the same numbers and ₹3,00,000 rent, figure (3) drops to 40% of salary = ₹2,40,000, which ties with the others, still fully exempt here, but in tighter cases the metro/non-metro line alone can cost tens of thousands. This is why plugging your real numbers into the HRA Calculator beats assuming your whole HRA is tax-free.

Documents and the landlord-PAN rule

To claim HRA cleanly, keep:

• Rent receipts for the year (monthly or quarterly), with the landlord's name, address, amount, and signature.
• A rent agreement, which strengthens the claim though it is not strictly mandatory.
• Proof of payment, bank transfers are far safer than cash, which invites scrutiny.
• The landlord's PAN if your annual rent exceeds ₹1,00,000. This is mandatory; without it, the exemption can be denied.

Employers collect these during the year for the Form 16 exemption, but the responsibility is yours. If you missed submitting proof to your employer, you can still claim the correct HRA directly in your return, the exemption is a matter of law, not of whether payroll captured it, provided you hold the documents in case the department asks.

Claiming rent without HRA: Section 80GG

What if you pay rent but your salary has no HRA component, or you are self-employed? A separate provision, Section 80GG, lets you claim a deduction for rent paid. It is capped at the least of: ₹5,000 per month; 25% of total income; or rent paid minus 10% of total income. It also requires that you, your spouse, or minor child do not own a home in the city where you work.

80GG is more modest than HRA and comes with Form 10BA, but for a freelancer or a salaried employee whose package genuinely has no HRA line, it is the correct route. If you run a profession, pair this with our guide to freelancer taxes under Section 44ADA to see how rent and presumptive income interact.

Paying rent to parents, and common mistakes

You can pay rent to a parent who owns the home and claim HRA, it is legitimate, but it must be genuine: an actual transfer of rent, and the parent must declare that rent as income in their return. Paper arrangements with no money moving are exactly what the department looks for, and family-rent claims are a known scrutiny trigger.

The mistakes that get claims disallowed: claiming HRA while living in your own house, cash rent with no receipts, missing landlord PAN above the ₹1 lakh threshold, using gross salary in the formula, and claiming under the new regime (where HRA exemption is not available). Getting any of these wrong can turn a legitimate benefit into a demand with interest.

Because HRA only exists in the old regime, the smartest move is to compute your tax both ways before deciding. Our income tax & ITR filing service optimises HRA alongside your regime decision and keeps the documentation audit-ready. book a free consultation for a quick review before you file.

An HRA claim checklist

To make your HRA claim both maximised and audit-proof, confirm each of these before filing:

• Regime: you are on the old regime (HRA is unavailable under the new one). Compare both first on the income tax e-filing portal's tax tools or a regime calculator.
• Calculation: you used basic + DA, not gross CTC, and applied the correct metro (50%) or non-metro (40%) cap.
• Receipts: rent receipts for the full period, with a rent agreement to back them.
• Payment trail: rent paid by bank transfer, not cash.
• Landlord PAN: collected if annual rent exceeds ₹1,00,000.
• Genuineness: if paying a family member, the rent actually moves and they declare it.

Keep this documentation for several years even after filing, HRA is a common scrutiny point, and a clean file turns a query into a two-minute reply rather than a disallowance.

How HRA interacts with a home loan

One question comes up constantly: can you claim both HRA and home-loan benefits at the same time? The answer is often yes, in genuine situations. If you own a house in one city (with a home loan) but live and work on rent in another, you can claim HRA on the rent you pay and the home-loan interest deduction under Section 24(b) on the owned property, both are legitimate because they relate to different homes.

Even in the same city it can be genuine, for example, your owned flat is far from work and let out, while you rent closer in. The key is that the arrangement must be real and defensible, not a paper structure to double-dip. Where the owned home is let out, the rent becomes taxable house-property income, which changes the maths, so the net benefit needs to be computed rather than assumed.

Both benefits sit under the old regime, so this combined planning only applies if you have opted out of the new regime. The official position and the relevant forms are set out on the income tax e-filing portal. Because the interaction of HRA, Section 24(b), and let-out property income gets intricate quickly, this is a common area where a short CA review pays for itself in tax saved and notices avoided.