HRA Exemption: Rules, Formula and Maximum Limit for FY 2025-26
House Rent Allowance is one of the most widely misunderstood salary components in Indian income tax. The exemption is not a fixed percentage of HRA received — it is the minimum of three separate calculations under Section 10(13A) read with Rule 2A of the Income Tax Rules. Getting the formula wrong by even one input costs employees thousands in unnecessary tax. This guide covers every variable, with worked examples for metro and non-metro employees.
Who Can Claim HRA Exemption?
HRA exemption under Section 10(13A) is available exclusively to salaried employees who meet all three conditions:
- The employer actually pays HRA as a designated salary component (it must appear in the salary structure)
- The employee actually lives in rented accommodation and pays rent
- 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).
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):
HRA Exemption Formula — Section 10(13A) read with Rule 2A
Condition 1: Actual HRA received from the employer during the year
Condition 2: Rent paid minus 10% of Salary (Basic + DA)
Condition 3: 50% of Salary (Basic + DA) — for metro cities
40% of Salary (Basic + DA) — for all other cities
Exempt HRA = LOWEST of the three amounts above
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:
| HRA Rate | Cities |
|---|---|
| 50% of salary (Basic + DA) | Delhi, Mumbai, Kolkata, Chennai (the exact four metro cities named under Income-tax Rule 2A — check whether your specific location falls within the statutory city limits rather than a broader NCR/metropolitan-region definition) |
| 40% of salary (Basic + DA) | All other cities including Bengaluru, Hyderabad, Pune, Ahmedabad, Noida, Gurugram, Surat, Jaipur, and every other city |
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 | Annual Calculation | Amount |
|---|---|---|
| 1. Actual HRA received | ₹20,000 × 12 | ₹2,40,000 |
| 2. Rent paid – 10% of salary | (₹22,000 × 12) – 10% × ₹6,60,000 | ₹2,64,000 – ₹66,000 = ₹1,98,000 |
| 3. 50% of salary (metro) | 50% × ₹6,60,000 | ₹3,30,000 |
| Exempt HRA = Lowest of the three | ₹1,98,000 | |
| Taxable HRA (₹2,40,000 – ₹1,98,000) | ₹42,000 added to income | |
Condition 2 is the binding constraint here — the rent paid is not high enough relative to salary. Priya could save an additional ₹14,040 (30% slab) in tax by increasing rent to ₹26,500/month, which would make all three conditions approximately equal.
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
| Condition | Annual Calculation | Amount |
|---|---|---|
| 1. Actual HRA received | ₹25,000 × 12 | ₹3,00,000 |
| 2. Rent paid – 10% of salary | (₹28,000 × 12) – 10% × ₹7,20,000 | ₹3,36,000 – ₹72,000 = ₹2,64,000 |
| 3. 40% of salary (non-metro) | 40% × ₹7,20,000 | ₹2,88,000 |
| Exempt HRA = Lowest | ₹2,64,000 | |
| Taxable HRA (₹3,00,000 – ₹2,64,000) | ₹36,000 added to income | |
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.
Documentation Requirements
| Situation | Required Documents |
|---|---|
| Annual rent below ₹1,00,000 | Rent receipts, rent agreement |
| Annual rent ₹1,00,000 or above | Rent receipts, rent agreement, landlord's PAN mandatory |
| Monthly rent above ₹50,000 | Additionally, TDS at 2% must be deducted under Section 194-IB and deposited by tenant |
| Paying rent to parents | Formal rent agreement, bank transfer proof (no cash), parent's property ownership documents; parent must declare rental income in their ITR |
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.