HRA exemption isn't simply 'the rent you pay' — it's the lowest of three specific numbers, and most people either overclaim or underclaim it because they get one of those three wrong. Here's the exact formula, worked examples, and the documentation you need.
House Rent Allowance exemption is one of the most commonly miscalculated parts of a salaried employee's tax return — not because the rule is complicated, but because it's a three-way minimum, and most people only check one or two of the three conditions.
The Three-Way Minimum Formula
Under Section 10(13A), the HRA exemption is the lowest of these three amounts:
- Actual HRA received from the employer
- Rent paid minus 10% of basic salary (+ dearness allowance, if part of retirement benefits)
- 50% of basic salary (for a metro city — Delhi, Mumbai, Kolkata, Chennai) or 40% of basic salary (for a non-metro city)
Whichever of these three is smallest is the amount you can claim as exempt — the rest of your HRA (if the actual amount received is higher) gets added back to taxable salary.
Worked Example — Metro City
| Basic salary (annual) | ₹6,00,000 |
| HRA received (annual) | ₹3,00,000 |
| Actual rent paid (annual) | ₹2,40,000 |
| City | Mumbai (metro) |
- Condition 1 — Actual HRA received: ₹3,00,000
- Condition 2 — Rent paid minus 10% of basic: ₹2,40,000 − ₹60,000 = ₹1,80,000
- Condition 3 — 50% of basic (metro): ₹3,00,000
Exemption = lowest of the three = ₹1,80,000. The remaining ₹1,20,000 of HRA received (₹3,00,000 − ₹1,80,000) is added to taxable salary.
Worked Example — Non-Metro City
| Basic salary (annual) | ₹6,00,000 |
| HRA received (annual) | ₹2,00,000 |
| Actual rent paid (annual) | ₹1,80,000 |
| City | Pune (non-metro for this purpose) |
- Condition 1 — Actual HRA received: ₹2,00,000
- Condition 2 — Rent paid minus 10% of basic: ₹1,80,000 − ₹60,000 = ₹1,20,000
- Condition 3 — 40% of basic (non-metro): ₹2,40,000
Exemption = lowest of the three = ₹1,20,000.
Common Mistakes
- Using gross salary instead of basic salary — the formula uses basic (+ DA if applicable to retirement benefits), not your full CTC or gross monthly salary; using the wrong base overstates or understates every part of the calculation
- Assuming the metro/non-metro classification by where the company is registered — it's based on where you actually reside and pay rent, not your employer's registered office
- Claiming HRA exemption without paying rent at all — you must actually be paying rent for a residence you occupy; claiming exemption while living rent-free (e.g., with parents, without any rent arrangement) is not valid, and PAN-matching between landlord and tenant on rent receipts is specifically checked when rent exceeds ₹1 lakh/year
- Not obtaining rent receipts — employers typically require rent receipts (and landlord PAN if annual rent exceeds ₹1 lakh) to process HRA exemption in TDS; without this, HRA may be fully taxed at source and needs to be reconciled at return-filing time instead
Paying Rent to a Parent — Is It Valid?
Yes, paying rent to a parent who owns the property is a legitimate way to claim HRA exemption, provided the arrangement is genuine — actual rent transfer (ideally via bank transfer, not cash), a rent agreement, and the parent declaring that rental income in their own return. This is commonly used but also commonly scrutinised, so documentation matters more here than in a standard landlord-tenant arrangement.
What If HRA Isn't Part of Your Salary Structure?
If your employer doesn't pay HRA as a distinct salary component (or you're self-employed), a separate deduction under Section 80GG is available instead — capped at the lowest of ₹5,000/month, 25% of total income, or rent paid minus 10% of total income — a much smaller benefit than HRA exemption, but still available where HRA isn't structured into your pay.
New Tax Regime Note
HRA exemption is available only under the old tax regime — it's one of the exemptions given up entirely if you opt for the new regime, which is why HRA-heavy taxpayers (renting in a metro, meaningful rent-to-basic ratio) are among those most likely to find the old regime still cheaper overall.
If you're unsure whether your specific rent, salary structure, and city combination gives you a meaningful HRA exemption — and whether that tips the old-vs-new regime decision in your favour — our ITR filing service works through this calculation as part of your return.
Frequently Asked Questions
Is HRA exemption available under the new tax regime?
No — HRA exemption under Section 10(13A) is available only under the old tax regime. If you opt for the new regime, HRA received is fully taxable regardless of rent paid.
What counts as a metro city for the 50% HRA calculation?
Only Delhi, Mumbai, Kolkata, and Chennai are treated as metro cities for this purpose, giving a 50%-of-basic-salary ceiling. All other cities, including Bengaluru, Pune, Hyderabad, and others, use the 40% ceiling regardless of their size or cost of living.
Do I need the landlord's PAN to claim HRA exemption?
Landlord PAN is required specifically when annual rent paid exceeds ₹1 lakh. Below that threshold, rent receipts alone are typically sufficient, though maintaining PAN details regardless is good practice in case of a query.
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