What is HRA and How is It Calculated? HRA Exemption Rules for India

The tax exemption on House Rent Allowance (HRA) is governed by Section 10(13A) of the Income-tax Act, 1961, and Rule 2A of the Income-tax Rules. This provision specifies the conditions under which a salaried employee may claim exemption from employer-paid HRA.

Legal Provision of Section 10(13A)

Section 10(13A) allows a salaried individual to claim an exemption on HRA received, provided the employee resides in rented residential accommodation and meets the prescribed conditions. The exemption is not automatic and must be calculated in accordance with the method set out in Rule 2A. Only the eligible portion of HRA is exempt, and the balance is taxable.

Conditions to Claim HRA Exemption

To claim HRA exemption under Indian income tax laws, the following conditions must be met:

• The individual must be a salaried employee
• HRA must be received from the employer as part of the salary
• The employee must be living in a rented house
• Rent must actually be paid during the financial year
• The employee must opt for the old tax regime
• Valid rent receipts and supporting documents must be available

Failure to meet any of these conditions can result in the denial of the HRA exemption.

Who Is Eligible and Who Is Not

Eligible taxpayers:

• Salaried employees receiving HRA
• Individuals paying rent for residential accommodation
• Taxpayers opting for the old tax regime

Not eligible:

• Self-employed individuals (no HRA component in income)
• Salaried employees not receiving HRA
• Individuals living in their own house without paying rent
• Taxpayers opting for the new tax regime

When HRA Becomes Fully Taxable

HRA becomes fully taxable in the following situations:

• The employee does not live in rented accommodation
• No rent is paid during the financial year
• HRA is received, but the employee opts for the new tax regime
• Required documentation, such as rent receipts or landlord PAN, is not provided when applicable

In such cases, the entire HRA amount is added to the employee’s taxable salary and taxed according to the applicable income tax slab.

The calculation of the House Rent Allowance (HRA) exemption in India is prescribed under Rule 2A of the Income-tax Rules. The exemption does not equal the HRA received; instead, it is calculated using a formula based on salary, rent paid, and the city of residence.

Salary Components Considered for HRA Calculation

Only specific components of salary are considered while calculating HRA exemption:

• Basic salary
• Dearness allowance (DA), only if it forms part of the salary for retirement benefits

Other allowances, such as special allowance, conveyance allowance, or bonus, are not included for HRA calculation purposes.

Basic Salary

Basic salary is the fixed component of an employee’s pay and serves as the basis for HRA calculation. A higher basic salary generally increases the potential HRA exemption, subject to applicable limits.

Dearness Allowance (If Applicable)

Dearness allowance is included in the HRA calculation only if it is considered for retirement benefits as per the employment terms. If DA is not part of retirement benefits, it is excluded from the calculation.

Explanation of the Three Calculation Criteria

HRA exemption is calculated based on the least of the following three amounts:

1. Actual HRA Received from the Employer
The total HRA paid by the employer during the financial year.

2. Rent Paid Minus 10% of Salary
Actual rent paid during the year minus 10% of basic salary (plus eligible DA). If the rent paid does not exceed 10% of the salary, no exemption is available under this criterion.

3. 50% or 40% of Salary (Based on City of Residence)

• 50% of basic salary (plus eligible DA) if the employee resides in a metro city (Delhi, Mumbai, Chennai, or Kolkata)
• 40% of basic salary (plus eligible DA) if the employee resides in a non-metro city

Rule: Least of the Three Is Exempt

The lowest of the three amounts above is eligible for HRA tax exemption under Section 10(13A). Any HRA received in excess of this exempt amount is treated as taxable income and added to the employee’s salary.

To simplify and accurately compute your HRA exemption, you can use an online tool such as the HRA Calculator. Understanding this step-by-step method is essential for correct tax planning and avoiding incorrect tax claims.

The amount of House Rent Allowance (HRA) that can be claimed as a tax exemption in India for FY 2025–26 (AY 2026–27) is not fixed. It depends on multiple factors, including salary structure, rent paid, and city of residence. The exemption is calculated strictly in accordance with Section 10(13A) of the Income-tax Act and Rule 2A of the Income-tax Rules.

Maximum HRA Exemption Limits

There is no absolute upper limit on the HRA exemption under the Income Tax Act. Instead, the maximum exemption is restricted to the least of the following three amounts:

• Actual HRA received from the employer
• Rent paid during the year minus 10% of basic salary (plus eligible DA)
• 50% of basic salary (plus eligible DA) for metro cities, or 40% for non-metro cities

Even if the rent paid or HRA received is high, the exemption cannot exceed the lowest of these three limits.

Impact of Salary Level and Rent Paid

• A higher basic salary generally increases the potential exemption, as the percentage-based limits (40% or 50%) increase accordingly.
• Higher rent paid increases the “rent minus 10% of salary” component, which is often the limiting factor for exemption.
• If rent paid is less than 10% of salary, or close to it, the HRA exemption may be minimal or nil, regardless of the HRA received.
• The city of residence (metro vs. non-metro) directly affects the percentage of salary exempt from taxation.

Therefore, both the salary structure and the actual rent paid play a crucial role in determining the amount of HRA that can be claimed.

Common Misconceptions About “Full HRA Claim”

Many taxpayers assume that the entire HRA received is tax-free, which is incorrect. Common misconceptions include:

• “I can claim full HRA if I submit rent receipts.” Submitting receipts alone does not guarantee full exemption; calculation limits still apply.
• “High rent automatically means full exemption.” Even with high rent, the exemption is capped by salary-based limits.
• “HRA has a fixed maximum limit.” There is no fixed statutory cap; the exemption is formula-driven.
• “HRA is available under the new tax regime.” HRA exemption is not available if the taxpayer opts for the new tax regime.

Understanding these limitations helps avoid incorrect claims and potential issues during income tax assessment.

The city in which a salaried employee resides plays a significant role in determining the amount of HRA exemption available under Indian income tax laws. The Income Tax Act classifies cities as metro or non-metro solely for the purpose of HRA calculations.

Definition of Metro Cities for HRA

For HRA exemption under Section 10(13A), the following four cities are treated as metro cities:

• Delhi
• Mumbai
• Chennai
• Kolkata

All other cities and towns in India are classified as non-metro cities, irrespective of population size or cost of living.

Difference in Exemption Percentage

The key difference between metro and non-metro cities lies in the percentage of salary considered for exemption:

• Metro cities: Up to 50% of basic salary (plus eligible DA) is considered for HRA exemption.
• Non-metro cities: Up to 40% of basic salary (plus eligible DA) is considered for HRA exemption.

This percentage forms one of the three limits used to compute the final HRA exemption.

Practical Impact on Exemption Amount

The higher percentage allowed for metro cities generally results in a larger potential HRA exemption, assuming other factors such as rent paid and HRA received remain the same. Employees living in metro cities often pay higher rents, and the 50% salary limit helps align the exemption with actual housing costs.

In non-metro cities, the lower 40% limit may restrict the exemption amount even when the rent paid is relatively high. As a result, employees in metro cities typically have a greater scope for claiming HRA exemption compared to those residing in non-metro locations.

Although the terms “HRA allowance” and “HRA deduction” are often used interchangeably, they have distinct meanings under Indian income tax rules. Understanding this difference helps salaried employees correctly identify the taxable and exempt portions of HRA.

What Is HRA Allowance in Salary?

HRA allowance refers to the total amount of House Rent Allowance paid by the employer as part of the employee’s salary structure. It is:

• Included in the gross salary
• Paid monthly along with basic salary
• Reflected in the salary slip and Form 16

By default, the entire HRA allowance is considered taxable income unless an exemption is claimed under the Income Tax Act.

What Is HRA Deduction / Exemption?

HRA deduction (more accurately called HRA exemption) is the portion of the HRA allowance that is exempt from income tax under Section 10(13A) of the Income Tax Act. The exemption is calculated using the prescribed formula, which depends on salary, rent paid, and city of residence.

Only the amount that qualifies under this calculation is exempt. There is no standard or fixed exemption amount.

Taxable vs Exempt Portion of HRA

Exempt portion: The amount calculated as per Section 10(13A) and Rule 2A. This portion reduces the employee’s taxable salary.

Taxable portion: The remaining HRA amount after deducting the exempt portion. This balance is added to salary income and taxed as per the applicable income tax slab.

In summary, HRA allowance is what you receive from your employer, while HRA exemption determines how much of that allowance is actually tax-free.

To claim House Rent Allowance (HRA) exemption in India under Section 10(13A), salaried employees must maintain and, where required, submit specific documents as proof of rent paid. Proper documentation is essential to ensure compliance and avoid disallowance of the exemption.

Rent Receipts

Rent receipts serve as primary proof of rent payment. They should include:

• Name of the tenant (employee)
• Name of the landlord
• Address of the rented property
• Rent amount paid
• Rental period
• Revenue stamp and landlord’s signature (if applicable)

Employers generally require rent receipts if the annual rent exceeds a specified threshold or during the year-end tax declaration process.

Rental Agreement

A rental or lease agreement supports the authenticity of the rental arrangement. It should clearly mention:

• Names of both tenant and landlord
• Property address
• Monthly rent amount
• Duration of the lease
• Terms and conditions of tenancy

While not always mandatory, a rental agreement is strongly recommended, particularly for higher rent claims or when under scrutiny by tax authorities.

Landlord PAN Requirements

If the annual rent paid exceeds ₹1,00,000, the employee must provide the landlord's Permanent Account Number (PAN) to the employer.

If the landlord does not have a PAN, a written declaration from the landlord stating the same must be obtained and submitted.

Failure to provide the landlord's PAN details when required may result in the denial of the HRA exemption.

Declaration to Employer

Employees are required to submit an HRA declaration to their employer, usually at the beginning of the financial year or during the investment proof submission window. The declaration includes:

• Rent paid details
• Landlord information
• Period of tenancy

If HRA is not claimed through the employer, the employee may claim the exemption directly when filing the income tax return, provided all supporting documents are available.

To claim the House Rent Allowance (HRA) exemption in India, salaried employees must submit an HRA declaration form to their employer. This process enables the employer to consider the exemption while calculating tax deducted at source (TDS) on salary.

What Information Is Included in the HRA Declaration Form

An HRA declaration form typically includes the following details:

• Employee name and employee ID
• Residential address of the rented property
• Period of tenancy (from and to dates)
• Monthly and annual rent paid
• Name of the landlord
• Landlord’s PAN (mandatory if annual rent exceeds ₹1,00,000)
• Employee’s declaration confirming that the information provided is correct

Some employers may also require copies of rent receipts and the rental agreement along with the declaration.

When and How to Submit the HRA Declaration

The HRA declaration is usually submitted at the beginning of the financial year as part of investment declarations.

Final proof of rent paid, including rent receipts and the landlord’s PAN, is typically required toward the end of the financial year or during the employer’s proof submission window.

Submission is generally made through the employer’s HR or payroll portal or in physical form, depending on company policy. Timely submission ensures that the correct HRA exemption is considered while deducting TDS.

Claiming HRA While Filing ITR vs Through Employer

Through employer: When HRA is claimed through the employer, the exemption is adjusted during the year, resulting in lower monthly TDS.

While filing the ITR: If HRA was not claimed, or was incorrectly claimed through the employer, it can still be claimed when filing the income tax return. In such cases, the employee must retain all supporting documents for scrutiny.

Both methods are valid under Indian income tax law, provided the employee meets the eligibility criteria and maintains proper documentation.

Specific living arrangements raise practical questions about the eligibility and validity of HRA exemption claims. Indian income tax laws permit HRA exemption in specified circumstances, provided the underlying conditions are met and proper documentation is maintained.

Claiming HRA While Living With Parents

An employee may claim an HRA exemption while living with their parents, provided that rent is actually paid to them. Key points to note include:

• A valid rental arrangement should exist between the employee and the parents.
• Rent payments should be made through bank transfer or other traceable modes to provide proof.
• Parents must report the rental income in their income tax returns.
• If the annual rent exceeds ₹1,00,000, the PAN of the parent (landlord) must be provided.
• If no rent is paid, HRA exemption cannot be claimed even if the employee lives in a parent-owned house.

Claiming HRA and Paying Home Loan EMIs

It is permissible to claim HRA and home loan tax benefits simultaneously, subject to the following conditions:

• The rented house and the owned house (on which the home loan is taken) should be different properties.
• Alternatively, the owned house may be located in a different city or may be uninhabitable.
• HRA can be claimed for rent paid, while home loan benefits can be claimed under Sections 80C (principal repayment) and 24(b) (interest paid).

This scenario is commonly used for legitimate tax planning when supported by factual circumstances.

Claiming HRA for Shared Accommodation

Employees living in shared accommodation can also claim the HRA exemption, subject to the following:

• Each tenant can claim exemption only for the rent actually paid by them.
• Rent receipts or rental agreements should clearly reflect the individual’s share of rent.
• Joint rental agreements are acceptable if individual contributions are clearly identifiable.

Proper documentation and accurate reporting are essential to ensure the validity of HRA claims in shared living arrangements.

While claiming the House Rent Allowance (HRA) exemption can lead to significant tax savings, errors or incorrect claims can result in denial of the exemption or scrutiny by the tax authorities. Below are some common mistakes salaried taxpayers in India should avoid.

Incorrect Rent Receipts

Submitting incomplete or incorrect rent receipts is a frequent issue. Common errors include:

• Missing landlord name or property address
• Incorrect rent amount or rental period
• Lack of signature or revenue stamp where applicable

Such discrepancies can lead employers or tax authorities to reject the HRA claim.

Claiming HRA Under the New Tax Regime

HRA exemption under Section 10(13A) is not available if the taxpayer opts for the new tax regime. Claiming HRA under the new regime when filing returns is a common mistake and can result in additional tax liability and interest.

Not Reporting Landlord PAN

If the annual rent paid exceeds ₹1,00,000, the landlord’s PAN must be reported. Failure to provide this information, or providing incorrect PAN details, can lead to disallowance of the exemption.

Overstating Rent Paid

Claiming HRA based on inflated or fictitious rent amounts is a serious compliance issue. Overstating rent without valid proof may attract penalties and scrutiny during assessment. Rent claimed must match actual payments supported by rent receipts and bank records.