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AY 2026-27 (FY 2025-26). HRA exemption rules below apply to the old tax regime. Under the new regime (default from FY 2024-25), HRA is fully taxable. Last reviewed 7 May 2026.
A Bengaluru engineer on ₹9.6 lakh basic, ₹4.8 lakh HRA and ₹35,000 monthly rent assumes the entire HRA component is tax-free. It is not. The actual exemption comes out to ₹3.24 lakh — leaving ₹1.56 lakh fully taxable. At the 30% slab that is nearly ₹49,000 of tax paid on HRA despite claiming every rupee of rent.
The HRA exemption is the minimum of three numbers, and one of them is almost always the binding constraint. Get the formula right, the metro rule right, and the documentation right, and you unlock one of the last big salary-linked deductions still standing in the old regime.
The formula — exactly
Section 10(13A) and Rule 2A spell out the exemption as the least of three amounts:
- Actual HRA received from your employer for the year
- Rent paid minus 10% of basic salary (plus DA forming part of retirement benefits)
- 50% of basic salary if you live in Delhi, Mumbai, Kolkata or Chennai — 40% of basic otherwise
The smallest leg is the exempt amount. The rest of your HRA is taxable.
Worked example. Bengaluru employee, basic ₹9,60,000, HRA ₹4,80,000, monthly rent ₹35,000 (₹4,20,000/year):
| Leg | Calculation | Value |
|---|---|---|
| Actual HRA received | — | ₹4,80,000 |
| Rent − 10% of basic | 4,20,000 − 96,000 | ₹3,24,000 |
| 40% of basic (non-metro) | 40% × 9,60,000 | ₹3,84,000 |
| Exempt HRA | Min of three | ₹3,24,000 |
Taxable HRA is ₹1,56,000. At the 30% slab plus cess, that is roughly ₹48,700 of tax on HRA the employee assumed was shielded.
Plug your own numbers in
The metro rule — only four cities
The Income Tax Act recognises only Delhi, Mumbai, Kolkata and Chennai as metros for HRA purposes. Everywhere else — Bengaluru, Hyderabad, Pune, Gurugram, Noida, Ahmedabad, Kochi — is non-metro, capping the third leg at 40% of basic.
It is a legacy definition that has not moved with India's economic geography. A software engineer paying ₹55,000 in Whitefield is taxed more stringently on HRA than a colleague paying the same rent in Bandra, purely because Bengaluru missed the cutoff. If you relocate mid-year between metro and non-metro, the exemption is calculated month-by-month at the applicable percentage. Double-check Form 16 if you moved.
Rent receipts, PAN, and Form 12BB
The documentation ladder:
- Rent up to ₹1,00,000/year: rent receipts from landlord are sufficient.
- Rent above ₹1,00,000/year: report the landlord's PAN in Form 12BB. If the landlord has no PAN, a signed declaration is required.
- Rent above ₹50,000/month to an individual landlord: you must deduct 2% TDS under Section 194-IB and deposit it through Form 26QC. Frequently missed; attracts penalties.
Pay rent by bank transfer, not cash. A bank trail is the single most persuasive piece of evidence in scrutiny — far more than a stack of signed receipts.
Warning
A cash-paid tenancy with no bank trail is very hard to defend if your return is picked up for scrutiny. Signed receipts alone are not enough once the rent crosses ₹1 lakh per year. Fix the payment method before fixing the paperwork.
Paying rent to parents — the legitimate version
Living with parents in a property they own and paying them rent is a common and legal structure. It holds up when the parents legally own the property (even a co-ownership share), rent moves through bank transfer at close to market rate, the parent declares it as income from house property, and there is a written agreement.
It breaks when rent is paid in cash or reversed through gifts, the parent does not declare the rent, the rent is inflated beyond local market rate, or the property is in a spouse's name (clubbing provisions apply and the exemption fails). Done right, this structure can save upward of ₹80,000 a year in household tax when the parent is in a much lower slab.
HRA disappears in the new regime
Section 115BAC specifically disallows Section 10(13A). Under the new regime, the entire HRA component of your salary is taxable regardless of rent paid.
For metro tenants this is often the single largest reason the old regime still wins. A Mumbai employee with ₹12 lakh basic, ₹6 lakh HRA and ₹60,000 monthly rent typically shelters ₹4-4.5 lakh under HRA. At the 30% slab, that is roughly ₹1.35 lakh of annual tax saving that simply vanishes in the new regime.
Before opting into the new regime, model tax with and without HRA using the tax regime comparison calculator and the old vs new regime comparison. If HRA is your dominant deduction, the old regime will almost always remain cheaper.
Info
Own a home in one city but pay rent in another because of work? You can claim both HRA exemption on the rented home and Section 24(b) interest deduction on the owned home — under the old regime. For the underlying housing decision, the rent vs buy calculator frames the trade-off before tax enters the picture.
Checklist before declaration
- Pull basic + DA from your payslip — not gross salary. It is the denominator.
- Sum actual rent paid for the year from bank statements, not from memory.
- Confirm your city's classification — only the four listed are metros.
- Apply the minimum-of-three rule.
- Submit rent receipts and landlord PAN (if rent > ₹1L) to payroll by the declaration deadline, typically January.
- Retain 12 months of bank-transfer evidence for at least 8 years.
- Before choosing the new regime, confirm you are not giving up more in HRA than you gain from lower slabs.
FAQ
The follow-up questions people usually ask after the main recommendation is already clear.
What is the HRA exemption formula in 2026?
HRA exemption under Section 10(13A) is the minimum of three values: (1) actual HRA received from employer, (2) rent paid minus 10% of basic salary (plus DA that forms part of retirement benefits), and (3) 50% of basic salary if you live in Delhi, Mumbai, Kolkata, or Chennai — 40% of basic otherwise. The smallest of these three numbers is the exempt portion. The exemption is available only under the old tax regime.
Which cities count as metro for HRA purposes?
Only four: Delhi, Mumbai, Kolkata and Chennai. Bengaluru, Hyderabad, Pune, Gurugram, Noida and Ahmedabad are treated as non-metro under the Income Tax Act despite their cost of living. This is a legacy definition that has not been updated. Living in Bengaluru caps the third leg of the HRA formula at 40% of basic, not 50%.
Is a PAN card of the landlord mandatory for HRA claims?
Yes, if annual rent exceeds ₹1,00,000 (₹8,334/month). You must report the landlord's PAN in Form 12BB submitted to your employer and again when filing your ITR. If the landlord refuses to share PAN, you must file a declaration from the landlord stating the reason — employers commonly disallow the exemption in this case, but you can still claim it when filing your return with supporting rent receipts, bank-transfer proof and the declaration.
Can I claim HRA if I pay rent to my parents?
Yes, if the arrangement is genuine. Your parents must legally own the property (even partly), you must pay rent through bank transfer, and they must declare this rent as income in their tax return. If your parents are in a lower tax slab than you, this is legitimate tax planning. It stops being legitimate when the rent is inflated beyond market rate, no money actually moves, or the parent doesn't declare it — all of which the department flags in scrutiny.
Can I claim HRA without rent receipts?
Employers typically require rent receipts to process the exemption in payroll. If you missed submitting them, you can still claim the exemption while filing your ITR as long as you can substantiate the rent paid — bank statements showing monthly transfers, a written rent agreement, and the landlord's PAN where required. A cash-paid tenancy with no documentation is difficult to defend in scrutiny and should be avoided.
Is HRA exemption available in the new tax regime?
No. HRA exemption under Section 10(13A) is an old-regime-only benefit. Under the new regime, the entire HRA component of your salary is fully taxable at your slab rate, even if you actually pay rent. This is one of the largest deductions you lose when switching to the new regime, and for metro tenants with high rent it often tips the old-vs-new regime decision back toward the old regime.