Money and tax
HRA Exemption: How It Is Calculated, With an Example
By the AllToolsDesk team · Updated
House rent allowance is part of many salary slips, but only some of it is tax-free, and only if you pay rent and choose the old tax regime. The tax-free part is the smallest of three amounts. Once you see the three side by side, the rule is easy to apply.
The rule
Exempt HRA is the least of:
- The HRA you actually received from your employer in the year.
- Rent paid in the year, minus 10% of your salary.
- 50% of salary if you live in one of the eight listed cities, or 40% anywhere else.
“Salary” here means basic pay plus dearness allowance (where DA counts for retirement benefits) plus any commission fixed as a percentage of turnover. It does not include HRA itself, bonus or other allowances.
From 1 April 2026, the 50% cities are Delhi, Mumbai, Kolkata, Chennai, Bengaluru, Hyderabad, Pune and Ahmedabad. Before that, only the first four counted as metros.
Worked example
Ravi works in Pune. His basic pay plus DA is ₹50,000 a month (₹6,00,000 a year), his HRA is ₹20,000 a month (₹2,40,000 a year), and he pays rent of ₹20,000 a month (₹2,40,000 a year).
| Test | Calculation | Amount |
|---|---|---|
| HRA received | ₹20,000 × 12 | ₹2,40,000 |
| Rent minus 10% of salary | ₹2,40,000 − ₹60,000 | ₹1,80,000 |
| 50% of salary (Pune) | 50% of ₹6,00,000 | ₹3,00,000 |
The smallest is ₹1,80,000, so that much HRA is tax-free and the remaining ₹60,000 is taxed as salary. In this case the rent test decides the answer, which is common: the exemption grows with the rent you pay, until it reaches the HRA you receive.
Now suppose Ravi lived in Jaipur instead and paid ₹12,000 a month. Rent minus 10% of salary is ₹1,44,000 − ₹60,000 = ₹84,000, and 40% of salary is ₹2,40,000. Only ₹84,000 of his ₹2,40,000 HRA would be exempt. The lower the rent compared with salary, the less the HRA saves.
If you pay rent but get no HRA
Self-employed people and employees whose salary has no HRA component can still claim a smaller deduction for rent in the old regime, known for years as section 80GG. It is the least of ₹5,000 a month, 25% of total income, or rent paid minus 10% of total income, and it is not available if you, your spouse or your minor child own a home in the same city. In the new regime, neither HRA nor this deduction is available.
Practical points
- HRA exemption exists only in the old regime. In the new regime, all HRA is taxable.
- Keep rent receipts. Employers usually ask for them, and for the landlord's PAN when yearly rent is above ₹1 lakh.
- Paying rent to a parent is allowed if they really own the home and declare the rent as their income. Paying rent to a spouse is generally not accepted.
- If you moved city or your rent changed during the year, work out each period separately and add them up.