TAX
How HRA Exemption Is Worked Out
House rent allowance is paid to you in full, but usually only part of it is tax-free. The exempt part is the smallest of three figures, and which one is smallest depends on your rent, your salary and your city.
The three tests
For each year, the exempt amount is the lowest of these:
- The HRA your employer paid you during the year.
- The rent you paid, minus 10% of your salary.
- 50% of your salary if you rent in a metro city, or 40% anywhere else.
Salary here does not mean gross pay. It means basic salary, plus dearness allowance where that counts towards retirement benefits, plus any commission fixed as a percentage of turnover. Other allowances are left out. Using gross salary is the most common reason people expect a bigger exemption than they get.
Whatever HRA is left after the exemption is taxed along with the rest of your salary.
A worked example
Say your basic salary is ₹50,000 a month, your HRA is ₹20,000 and you pay ₹18,000 a month in rent in a metro city. Over the year:
- HRA received is ₹2,40,000.
- Rent paid is ₹2,16,000. Ten percent of salary is ₹60,000, so the rent test gives ₹1,56,000.
- 50% of salary is ₹3,00,000.
The rent test gives the lowest figure, so ₹1,56,000 is exempt and the remaining ₹84,000 of HRA is taxable. That works out to ₹13,000 a month tax-free from a ₹20,000 allowance.
Which test usually limits you
Knowing which test sets the limit tells you what would change the result.
When rent is low compared with salary, the rent test binds, because only rent above a tenth of salary counts. In the example above, rent of ₹4,000 a month would fall below 10% of salary and the exemption would drop to nothing, even with ₹2,40,000 of HRA paid.
When rent is high and salary modest, the percentage cap binds. Someone on a ₹30,000 basic salary with ₹15,000 of HRA, paying ₹30,000 rent outside a metro, gets ₹1,44,000 exempt. That is 40% of their salary, lower than both the HRA and the rent test.
When salary and rent are both high, the HRA itself is often the limit. On a ₹1 lakh basic with ₹20,000 HRA and ₹60,000 rent in a metro, the full ₹2,40,000 of HRA is exempt, and paying more rent would not raise it.
Metro or not
The 50% rate applies to the cities the tax rules name as metro. For FY 2026-27 the Income-tax Rules treat eight cities that way: Delhi, Mumbai, Kolkata, Chennai, Bengaluru, Hyderabad, Pune and Ahmedabad. In earlier years only the first four counted, so check the list for the year you are filing.
Documents and common mistakes
- Keep rent receipts and a rental agreement. Your employer may ask for them before counting the exemption in your TDS, and the tax department can ask for them later.
- If the rent for the year is more than ₹1 lakh, you need your landlord's PAN.
- Paying rent to a parent is allowed when the arrangement is real: you transfer the rent to them, and they show it as income.
- You cannot claim rent for a home you own and live in, or for months when you were not renting.
- If your rent or salary changed during the year, work out each period separately and add the results, since the tests apply to the figures for the time you were renting.
Only under the old regime
The HRA exemption is not available under the new tax regime. If you pay rent, it is often the largest deduction you would give up by choosing the new regime, so put it first when you compare them. The old vs new regime walkthrough shows how to weigh it against the new regime's lower rates.
If your salary has no HRA component, a separate deduction for rent paid may be available under the old regime, with its own conditions and a lower ceiling.
The HRA calculator runs the three tests on your own figures, shows the exempt and taxable amounts per month and per year, and tells you which test set the limit.