HRA Exemption Calculation: Section 10(13A) Rules with Example

House Rent Allowance is often the biggest salaried exemption, but only the least of three formula values escapes tax under section 10(13A). Getting the calculation wrong means either paying extra tax or inviting scrutiny. This guide explains the formula, a metro versus non-metro example, the documents to keep and the errors to avoid.

The Three-Condition HRA Exemption Formula

For FY 2025-26 (AY 2026-27), the exempt HRA is the least of the following three amounts. Here, salary means basic pay plus dearness allowance as per your terms of employment. Any HRA beyond the exempt portion is taxed as salary income.

• (a) the actual HRA received for the year;
• (b) rent paid minus 10% of salary (basic plus DA);
• (c) 50% of salary in metro cities — Delhi, Mumbai, Kolkata or Chennai — or 40% of salary elsewhere.

The exemption reduces your gross salary in the ITR and exists only in the old regime. The new regime for FY 2025-26 does not allow any HRA exemption at all.

Worked Example: Metro vs Non-Metro

Assume an employee with basic plus DA of ₹4,80,000 a year, HRA of ₹2,16,000 a year (₹18,000 monthly) and annual rent of ₹3,00,000 (₹25,000 monthly). The three conditions work out as follows.

In the metro case, the actual HRA of ₹2,16,000 is the smallest, so the full allowance escapes tax. In a non-metro city, the 40% cap of ₹1,92,000 becomes the binding limit, cutting the exemption by ₹24,000. The same rent and salary therefore produce different tax outcomes purely because of location. Verify your own figures with the HRA calculator.

Documents to Keep for HRA Claims

• Monthly or quarterly rent receipts showing the landlord’s name and the rent amount.
• The landlord’s PAN where annual rent exceeds ₹1,00,000.
• A signed or registered rent agreement as supporting evidence.
• Bank transfers or UPI records that show the rent was actually paid.

Create compliant receipts in seconds with our rent receipt generator. Keep the receipts alongside payment proofs, since employers now cross-check claims during proof submission.

Common HRA Errors to Avoid

Do not claim HRA and home loan interest for self-occupancy of the same property. Rent paid to a spouse is a frequent trigger for scrutiny, since the arrangement must reflect a genuine tenancy. Receipts without matching payments, or claims above the actual rent, are the classic red flags the department looks for.

Another mistake is ignoring the 10% of salary condition. If rent is barely above 10% of salary, the exemption shrinks sharply, and planning the rent level helps. Employees living in parental homes face the same limits and should keep the arrangement commercially honest.

HRA in the New Regime

Section 115BAC removes the HRA exemption for FY 2025-26 if you opt for the new regime. The entire HRA component then becomes taxable salary. Employees choosing between regimes should price the HRA loss into the comparison, because a large exemption often keeps the old regime competitive at higher salaries.

Key Takeaways

• Exempt HRA is the least of actual HRA, rent minus 10% of salary, and 50% or 40% of salary.
• Metro status for the 50% test applies only to Delhi, Mumbai, Kolkata and Chennai.
• The landlord’s PAN is needed once annual rent crosses ₹1,00,000.
• HRA is an old-regime benefit; the new regime for FY 2025-26 disallows it.
• Never claim HRA and home loan interest on the same self-occupied property.

Frequently Asked Questions

Is HRA fully tax-free?

No. Only the least of the three formula amounts is exempt, and the balance is taxed as salary. Where rent is low relative to salary, the exempt portion can be much smaller than the HRA received.

Can I claim HRA if my landlord is a family member?

You can claim HRA for rent paid to parents or a spouse only if a genuine tenancy exists and rent is actually paid. Payments to a spouse are especially scrutinised. Keep receipts, agreements and bank transfers as evidence.

What if I pay rent above ₹1 lakh a year?

Collect the landlord’s PAN and report it to your employer, since the requirement applies beyond ₹1,00,000 of annual rent. The receipt trail and payment records should both exist for the full amount claimed.

Can I claim HRA under the new regime?

No. The new regime under section 115BAC does not allow the HRA exemption for FY 2025-26. The entire HRA is taxed as part of salary if you opt for it.

I own a house in one city and rent in another. Can I claim both?

Yes, if the rented house is where you actually live for work and the owned house is elsewhere. The error arises when HRA and home loan interest are claimed for the same self-occupied property without a genuine arrangement. Document both facts properly.

Disclaimer: Tax laws change frequently. Verify current rates and deadlines on the official portals (incometax.gov.in, gst.gov.in) or consult a qualified professional before acting.