HRA Exemption Explained (with Worked Examples)
By Dinesh Babu, Founder & Editor, PaisaCalc · Updated July 2026
House Rent Allowance (HRA) is one of the biggest tax breaks available to salaried Indians who live in rented homes — but the exemption is not simply the whole HRA on your payslip. It's the least of three amounts, and it only applies under the old tax regime. This guide explains the rule and works through two full examples.
What is HRA exemption?
HRA is an allowance your employer pays as part of your salary to cover rent. Under Section 10(13A) of the Income Tax Act, part of that HRA can be exempt from tax if you actually pay rent for accommodation you occupy.
The key word is part. You cannot exempt your entire HRA just because you receive it — the exempt amount is capped by a formula, and any HRA above that cap is taxable as normal salary.
Old regime only — an important condition
HRA exemption is available only under the old tax regime. If you opt for the new regime (the default from FY 2023-24 onwards), you cannot claim HRA exemption at all — your full HRA is taxable.
So if you pay significant rent and receive HRA, that's a point in favour of the old regime. Always compare your total tax under both regimes before deciding.
The three-part rule
The exempt HRA is the least (smallest) of these three amounts:
- (a) The actual HRA received from your employer.
- (b) Rent paid during the year minus 10% of your salary (basic + dearness allowance).
- (c) 50% of salary (basic + DA) if you live in a metro — Delhi, Mumbai, Kolkata or Chennai — otherwise 40%.
What counts as 'salary' here
For this calculation, salary means basic pay plus dearness allowance (DA), if your DA forms part of retirement benefits, plus any commission that is a fixed percentage of turnover. For most private-sector employees it is simply the basic salary.
The metro list for the 50% figure is specifically the four cities of Delhi, Mumbai, Kolkata and Chennai. Every other city, including large ones like Bengaluru, Hyderabad and Pune, uses the 40% figure.
Worked example 1 — a metro tenant
Rahul lives in Mumbai (a metro). His basic salary is ₹50,000 a month, he receives HRA of ₹20,000 a month, and he pays rent of ₹25,000 a month. Let's compute the annual figures.
Annual basic = ₹6,00,000. Annual HRA received = ₹2,40,000. Annual rent = ₹3,00,000.
Now the three amounts: (a) actual HRA = ₹2,40,000; (b) rent minus 10% of basic = ₹3,00,000 − ₹60,000 = ₹2,40,000; (c) 50% of basic (metro) = ₹3,00,000. The least of the three is ₹2,40,000, so Rahul's entire HRA is exempt in this case.
| Component of the rule | Amount |
|---|---|
| (a) Actual HRA received | ₹2,40,000 |
| (b) Rent paid − 10% of basic | ₹2,40,000 |
| (c) 50% of basic (metro) | ₹3,00,000 |
| Exempt HRA (least of the three) | ₹2,40,000 |
| Taxable HRA | ₹0 |
Worked example 2 — a non-metro tenant
Anjali lives in Pune (non-metro). Her basic salary is ₹40,000 a month, HRA is ₹16,000 a month, and she pays rent of ₹12,000 a month.
Annual basic = ₹4,80,000. Annual HRA = ₹1,92,000. Annual rent = ₹1,44,000.
The three amounts: (a) actual HRA = ₹1,92,000; (b) rent minus 10% of basic = ₹1,44,000 − ₹48,000 = ₹96,000; (c) 40% of basic (non-metro) = ₹1,92,000. The least is ₹96,000, so ₹96,000 is exempt and the remaining ₹96,000 of her HRA is taxable.
| Component of the rule | Amount |
|---|---|
| (a) Actual HRA received | ₹1,92,000 |
| (b) Rent paid − 10% of basic | ₹96,000 |
| (c) 40% of basic (non-metro) | ₹1,92,000 |
| Exempt HRA (least of the three) | ₹96,000 |
| Taxable HRA | ₹96,000 |
Practical points and documents
- Keep rent receipts and your rent agreement — employers require them to allow HRA in Form 16.
- If annual rent exceeds ₹1 lakh, you must report the landlord's PAN to your employer.
- You can claim HRA even while paying a home loan on a different property, subject to conditions — check your specific case.
- No HRA on your payslip? Self-employed and salaried people without HRA may instead claim rent under Section 80GG, which has its own separate limits.
Key takeaways
- HRA exemption = the least of (a) actual HRA, (b) rent − 10% of basic, and (c) 50% (metro) or 40% (non-metro) of basic.
- It applies only under the old regime; the new regime gives no HRA exemption.
- The metros for the 50% figure are only Delhi, Mumbai, Kolkata and Chennai.
- Any HRA above the exempt amount is taxable — you rarely get the whole HRA tax-free.
- These are illustrative calculations; confirm your figures with your employer or a tax professional.
Calculate your own HRA exemption
Use our HRA calculator to enter your basic, HRA, rent and city and instantly see your exempt and taxable HRA under the old regime.