HRA exemption calculation formula, metro rates and old-regime rules

HRA Exemption Calculation (2026): Formula, 8 Metro Cities & Old-Regime Rules

by

Quick answer

HRA exemption is the smallest of three amounts: the HRA you actually receive, your rent paid minus 10% of your salary, and 50% of your salary if you live in a metro city or 40% elsewhere. Only the smallest figure is tax-free, and the rest of your HRA is taxed as salary. The exemption works only in the old tax regime.

If you get house rent allowance (HRA) in your salary and you pay rent, part of that allowance can be tax-free. The catch is that the tax-free part is almost never the full HRA. A fixed formula decides how much is exempt, and the rest is added to your taxable salary. This guide works through that formula with real numbers, the new 8-city metro list, and the old-regime rule that trips up many salaried employees.

HRA exemption by the numbers

  • 50% of salary is the city limit in the 8 metro cities from FY 2026-27, and 40% everywhere else (Income-tax Rules, 2026, Rule 279).
  • 10% of salary is subtracted from your rent before the comparison in the second limb of the formula (Rule 2A / Rule 279).
  • Rs 1 lakh a year is the rent level above which you must give your landlord’s PAN to your employer.
  • 8 cities now get the 50% rate: Delhi, Mumbai, Kolkata, Chennai, Bengaluru, Hyderabad, Pune and Ahmedabad — up from 4 cities before FY 2026-27.

How is HRA exemption calculated?

The rule is simple once you see it. Work out three amounts, then take the smallest:

  1. Actual HRA received — the HRA component in your salary slips for the year.
  2. Rent paid minus 10% of salary — your total rent for the year, minus 10% of your salary as defined for HRA. If your rent is less than 10% of salary, this figure is zero.
  3. City limit on salary — 50% of salary if you live in a metro city, or 40% of salary if you live anywhere else.

The smallest of the three is your exempt HRA. The balance (HRA received minus exempt HRA) is taxable and is added to your salary income.

One point people miss: the calculation runs period by period. If your basic pay, rent, or city changed during the year, work out each period separately and add the results. A single blended annual figure can give the wrong answer when something changed mid-year.

What counts as salary for HRA?

For this formula, “salary” does not mean your full CTC. It means only:

  • Basic salary.
  • Dearness allowance (DA), but only the part that counts for retirement benefits.
  • Commission paid as a fixed percentage of turnover, if any.

It does not include bonus, special allowance, leave travel allowance, perquisites, or the HRA itself. This is the most common error in HRA math: using CTC inflates the salary figure, which inflates the 10% deduction in limb 2 and shrinks the exemption. Always start from basic plus eligible DA, not from your gross pay.

Which cities qualify for the 50% HRA rate?

The city that matters is the city where you live and pay rent, not the city where your employer sits.

For FY 2025-26 (the return filed in 2026), only four cities get the 50% rate: Delhi, Mumbai, Kolkata and Chennai. Every other city, including Bengaluru and Hyderabad, uses 40% for that year.

From FY 2026-27 (tax year 2026-27) the list grows to eight cities: Delhi, Mumbai, Kolkata, Chennai, Bengaluru, Hyderabad, Pune and Ahmedabad. The change comes from the Income-tax Rules, 2026. If you live in one of the four new cities, your city limit jumps from 40% to 50% of salary — but only from FY 2026-27 onward, not for the FY 2025-26 return.

Worked example 1: Mumbai employee, FY 2025-26

Take an employee in Mumbai with a monthly basic salary of Rs 50,000, monthly HRA of Rs 20,000, and monthly rent of Rs 18,000. Assume DA and turnover commission are nil, so salary for HRA is Rs 6,00,000 a year.

  1. Actual HRA received: Rs 20,000 x 12 = Rs 2,40,000.
  2. Rent minus 10% of salary: Rs 2,16,000 – Rs 60,000 = Rs 1,56,000.
  3. 50% of salary (metro): Rs 3,00,000.

The smallest figure is Rs 1,56,000. That is the exempt HRA. The remaining Rs 84,000 (Rs 2,40,000 – Rs 1,56,000) is taxable salary. At a 30% slab rate, an exemption of Rs 1,56,000 saves about Rs 48,700 in tax after the 4% health and education cess.

Worked example 2: Bengaluru employee, FY 2026-27

Now take an employee in Bengaluru with a monthly basic of Rs 60,000, monthly HRA of Rs 25,000, and monthly rent of Rs 22,000. Salary for HRA is Rs 7,20,000 a year.

  1. Actual HRA received: Rs 25,000 x 12 = Rs 3,00,000.
  2. Rent minus 10% of salary: Rs 2,64,000 – Rs 72,000 = Rs 1,92,000.
  3. 50% of salary (Bengaluru is now a metro): Rs 3,60,000.

The exempt amount is Rs 1,92,000, and Rs 1,08,000 of the HRA is taxable. Here the rent limb binds, so the new 50% rate does not change this person’s answer — but it does change the answer when the city limit is the binding limb, as the next example shows.

Where the new 50% rate actually changes the answer

Consider a Bengaluru employee with a monthly basic of Rs 60,000, monthly HRA of Rs 40,000, and monthly rent of Rs 35,000. Salary for HRA is Rs 7,20,000; annual HRA is Rs 4,80,000; annual rent is Rs 4,20,000.

  • Rent minus 10% of salary: Rs 4,20,000 – Rs 72,000 = Rs 3,48,000.
  • City limit at 40% (FY 2025-26 rule): Rs 2,88,000. Exempt HRA = Rs 2,88,000.
  • City limit at 50% (FY 2026-27 rule): Rs 3,60,000. Exempt HRA = Rs 3,48,000.

The same person, the same rent, but Rs 60,000 more exempt HRA from FY 2026-27 because Bengaluru joined the metro list. This is why the city list matters: it only helps when your rent is high and your HRA is high, but then it helps a lot.

What changed in 2026: old section, new section

Under the Income-tax Act, 1961, HRA exemption sat in Section 10(13A), read with Rule 2A of the Income-tax Rules, 1962. From 1 April 2026 the Income-tax Act, 2025 applies, and the exemption moved to Section 11 read with Schedule III (serial number 11), with the limits in Rule 279 of the Income-tax Rules, 2026. The formula itself did not change — only the section references and the metro list did.

Two related changes came with the new Rules. Employee declarations to the employer now use Form 124, which replaced Form 12BB, and the form asks you to disclose your relationship with the landlord. That disclosure matters for the next section.

Can I claim HRA exemption in the new tax regime?

No. HRA exemption is available only in the old tax regime. Under the new tax regime — Section 115BAC of the 1961 Act, now Section 202 of the 2025 Act — the full HRA is taxable as part of your salary.

This is the decision that matters most. The new regime gives lower slab rates and a Rs 75,000 standard deduction for salaried employees, but it takes away HRA exemption and most other deductions. If your rent is high and you also claim 80C, 80D and similar deductions, the old regime can still win. Salaried employees without business income can pick old or new regime afresh each year when they file their return, so run both calculations before you declare a regime to your employer. Our guide on old vs new tax regime walks through that comparison.

Can I claim HRA if I pay rent to my parents?

Yes, if the arrangement is genuine. Tax officers look at substance, not just paperwork, so all of these should hold:

  • Your parents own the house. It should not be a house you own yourself or jointly with them.
  • You actually pay rent, month by month, by bank transfer — not cash, and not just on paper.
  • There is a rent agreement and you keep rent receipts.
  • Your parents declare the rent as income from house property in their own return. They get a 30% standard deduction on that rental income, plus any municipal taxes paid, so their tax on it is often low.

Rent paid to a spouse does not qualify — the law treats a couple as one unit for this purpose, so that claim is usually rejected. And keep the rent near market levels: a rent far above what similar homes in the area fetch looks like a sham arrangement and invites questions.

Do I need my landlord’s PAN?

Yes, if your total rent for the year crosses Rs 1 lakh (about Rs 8,334 a month). Above that level your employer will ask for the landlord’s PAN along with your rent declaration. If the landlord has no PAN, a declaration to that effect is the fallback, but expect your employer to be strict about it.

Below Rs 1 lakh a year you still need proof of rent — the agreement and receipts — even though PAN is not asked for. And if you could not give the details to your employer during the year, you can still claim the exemption while filing your ITR, as long as you hold the supporting documents. For FY 2025-26 the ITR utility asks for the HRA details in a dedicated schedule rather than a single exempt-allowance figure, so keep your salary, HRA, rent and city figures ready.

Documents you need for an HRA claim

  • A signed rent agreement showing a genuine tenancy.
  • Monthly rent receipts for the rent you paid.
  • Bank statements or transfer proof showing rent actually paid.
  • Your landlord’s PAN, if annual rent exceeds Rs 1 lakh.
  • Salary slips showing the HRA component, so the actual HRA figure is provable.
  • The Form 124 declaration you gave your employer, including the landlord-relationship disclosure.

Keep these for the years the department can review your return. Nothing is uploaded with the return itself, but the documents are what stand between a clean claim and a disallowed one.

Can I claim HRA and home loan deduction together?

Yes, when the two benefits relate to different houses. HRA is for the rented home you live in for work. Home loan benefits — interest under Section 24(b) (Section 22 under the 2025 Act) and principal under Section 80C (Section 123 under the 2025 Act) — are for a house you own or are constructing, usually in a different city or for a future home.

So a person who works in Mumbai on rent while owning an under-construction flat in Pune can claim both. What does not work is claiming HRA for a house you own and live in — if you live in your own house, there is no rent paid, and the rent limb of the formula is zero.

No HRA in your salary? Check Section 80GG

If your salary has no HRA component, or you are self-employed, HRA exemption does not apply to you at all. A separate deduction under Section 80GG (Section 134 under the 2025 Act) may cover rent paid instead, but it has its own limits and conditions. Our guide on 80GG deduction for rent without HRA explains who qualifies and how much it allows.

Common mistakes to avoid

  • Using CTC as “salary”. Only basic, eligible DA and turnover commission count. CTC inflates the 10% deduction and shrinks the exemption.
  • Claiming without paying rent. If you live rent-free or in your own house, there is no exemption to claim.
  • Forgetting the regime. HRA exemption exists only in the old regime. Picking the new regime wipes it out, whatever your rent.
  • Missing the landlord’s PAN when rent crosses Rs 1 lakh a year — your employer cannot process the claim without it.
  • Using the wrong city rate. Bengaluru, Hyderabad, Pune and Ahmedabad get 50% only from FY 2026-27, not for the FY 2025-26 return.
  • Paper-only rent to relatives. A rent agreement with no bank transfers and no declaration by the landlord is the first thing that gets questioned.

Frequently asked questions

How is HRA exemption calculated?

Take the smallest of three amounts: the HRA you actually receive, your rent paid minus 10% of your salary (basic plus eligible DA), and 50% of salary in a metro city or 40% elsewhere. The smallest figure is exempt, and the rest of your HRA is taxed as salary. If your salary, rent or city changed during the year, calculate each period separately and add the results.

Can I claim HRA exemption under the new tax regime?

No. The new tax regime (Section 115BAC of the 1961 Act, now Section 202 of the 2025 Act) does not allow HRA exemption at all. You can claim it only if you choose the old tax regime. Salaried employees without business income can choose afresh every year at filing time, so compare both regimes before you decide.

Can I claim HRA if I live with my parents and pay them rent?

Yes, if the arrangement is real. Your parents must own the house, you must actually pay rent by bank transfer, and you need a rent agreement plus receipts. Your parents must declare the rent as income from house property in their return. Rent paid to a spouse does not qualify.

Do I need my landlord’s PAN for HRA?

You must give your landlord’s PAN to your employer if your total rent for the year exceeds Rs 1 lakh. Below that level, PAN is not required, but you still need rent receipts and an agreement as proof. Without the PAN above the threshold, your employer cannot process the exemption.

Which cities qualify for the 50% HRA rate?

For FY 2025-26 the 50% rate applies only in Delhi, Mumbai, Kolkata and Chennai. From FY 2026-27 it also applies in Bengaluru, Hyderabad, Pune and Ahmedabad — eight cities in total. The city that counts is where you live and pay rent, not where your employer is based.

Can I claim HRA and home loan deduction together?

Yes, when they relate to different houses. HRA covers the rented home you live in for work, while home loan interest and principal deductions cover a house you own or are constructing, usually elsewhere. You cannot claim HRA for a house you own and live in yourself, because no rent is paid.

Official sources

Reviewed by Asuthod Rathod, CA — Last updated: 26 October 2026.

Disclaimer: This article gives general information only and is not tax advice. Tax rules change, and personal circumstances vary. Check your figures with a qualified tax adviser before filing.

Leave a Comment