HRA Exemption: Rules, Formula and Maximum Limit for FY 2025-26

Who Can Claim HRA Exemption?

HRA exemption under Section 10(13A) is available exclusively to salaried employees who meet all three conditions:

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1. The employer actually pays HRA as a designated salary component (it must appear in the salary structure)
2. The employee actually lives in rented accommodation and pays rent
3. The employee opts for the old tax regime — HRA is not available under the new tax regime under any circumstances

Self-employed individuals and professionals who do not receive HRA from an employer cannot claim Section 10(13A). They may instead be eligible for Section 80GG, which allows a deduction for rent paid (subject to lower limits and stricter conditions).

For the connected rule or filing step, see Maximum HRA Exemption: Why There Is No Flat Limit.

The Three-Condition Formula

The exempt HRA is the lowest of the following three amounts calculated for the year (or month, if there are changes during the year):

What "Salary" Means for HRA — A Common Mistake

The definition of "salary" for HRA computation is specific and narrow. It includes only:

• Basic salary
• Dearness Allowance (DA) — but only the portion that forms part of retirement benefit computations
• Commission, if received as a fixed percentage of turnover

Excluded from "salary": HRA itself, special allowance, performance bonus, LTA, city compensatory allowance, transport allowance, overtime, and any other perquisites. Many employees inflate the salary base by including gross salary — this is incorrect and overstates the exemption.

Metro vs Non-Metro City Classification (FY 2025-26)

For FY 2025-26 (AY 2026-27) — meaning income earned between April 1, 2025 and March 31, 2026 — the metro city list for the 50% HRA benefit consists of four cities only:

Worked Example 1: Mumbai Employee (Metro)

Priya works at a Mumbai company. Monthly details: Basic ₹50,000 | DA ₹5,000 | HRA received ₹20,000 | Rent paid ₹22,000.

Salary (Basic + DA for HRA purposes): ₹55,000/month × 12 = ₹6,60,000/year

Condition 2 is the binding constraint here — the rent paid is not high enough relative to salary. If Priya actually pays rent of ₹25,500/month for the same accommodation period, the rent limb becomes ₹3,06,000 − ₹66,000 = ₹2,40,000. The minimum then equals her actual HRA of ₹2,40,000; the city limb stays ₹3,30,000. The additional exemption is ₹42,000. If Priya has enough additional taxable income to put the whole extra exemption in the 30% band, with 4% cess and no surcharge or rebate effect, the tax reduction is ₹42,000 × 30% × 1.04 = ₹13,104. Paying ₹42,000 more annual rent to save ₹13,104 tax still increases her net cost by ₹28,896. On the listed salary components alone, after the ₹50,000 old-regime salary deduction and without other deductions, the relevant marginal band is 20%, so the saving would instead be ₹42,000 × 20% × 1.04 = ₹8,736. Claim only rent actually paid; a larger exemption alone is not a reason to increase rent.

Worked Example 2: Bengaluru Employee (Non-Metro, FY 2025-26)

Rahul works in Bengaluru. Monthly: Basic ₹60,000 | DA ₹0 | HRA received ₹25,000 | Rent paid ₹28,000.

Salary: ₹60,000 × 12 = ₹7,20,000/year

Note: Bengaluru is a non-metro city under Rule 2A. The 40% rate applies for Rahul's Condition 3. Only Delhi, Mumbai, Kolkata and Chennai qualify for the 50% rate.

Worked-example sources: Income Tax Department: defined salary and three HRA limits; notified 2026 Rules, Rule 279 (current eight-city list). Examples assume a full year with unchanged inputs.

Documentation Requirements

Rent receipts must show: date of payment, amount, landlord's name and address, property address, and landlord's signature. Digital rent receipts from reputable rent management platforms are acceptable.

HRA When Job Changes During the Year

If you change jobs in the middle of FY 2025-26, HRA exemption is computed separately for each employment period. Submit Form 12B to your new employer declaring salary and HRA received from the previous employer — this allows the new employer to compute TDS correctly for the full year. Without Form 12B, the new employer has no visibility into the previous HRA received, which can lead to under-deduction and a tax demand at ITR time.

Section 80GG: For Those Without HRA in Salary

Employees whose salary structure does not include an HRA component, and self-employed individuals, can claim rent paid under Section 80GG — but the limits are far lower. The deduction is the lowest of:

• ₹5,000 per month (₹60,000 per year)
• 25% of total income
• Rent paid minus 10% of total income

Section 80GG also requires that neither you, your spouse, nor your minor child own any residential property in the city where you reside. Section 80GG is available under the old tax regime only.