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:

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).

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. 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

Note: From FY 2026-27, Bengaluru shifts to the 50% metro category, which would increase Rahul's Condition 3 to ₹3,60,000 and make his exempt HRA ₹2,64,000 still (Condition 2 binding). The city expansion helps employees where Condition 3 was previously the binding constraint.

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.