House Rent Allowance (HRA) is one of the most commonly misunderstood salary exemptions. Receiving HRA in a salary slip does not make the full allowance tax-free. Under section 10(13A) read with Rule 2A, the exemption is calculated using a three-part formula, and the lowest eligible amount is exempt. The Income Tax Department's salary-income guidance sets out this calculation and the meaning of salary for this purpose.
Who can claim HRA exemption?
HRA exemption is relevant to a salaried employee who actually receives HRA and pays rent for residential accommodation. The Department's guidance states that HRA is fully taxable where the employee lives in his or her own house or does not pay rent. A person who does not receive HRA should not use section 10(13A) merely because rent is paid; a separate provision such as section 80GG may need to be examined if its conditions are satisfied.
Tax regime also matters. The Department's old-versus-new tax regime FAQ confirms that section 10(13A) HRA exemption is available under the old tax regime but not under the new tax regime. Therefore, the HRA calculation is useful only after confirming that the taxpayer is eligible to claim the exemption under the chosen regime.
How is HRA exemption calculated?
The exempt amount is the lowest of the following three amounts:
- Actual HRA received.
- Rent paid minus 10% of salary.
- 50% of salary if the rented house is situated in Mumbai, Calcutta, Delhi or Chennai; otherwise 40% of salary.
For this calculation, the Department's salary guidance describes salary as basic salary plus dearness allowance where it forms part of retirement benefits, plus turnover-based commission. This definition matters because using gross salary or cost-to-company instead can materially overstate or understate the exemption.
Worked example
Assume an employee under the old tax regime receives basic salary of ₹60,000 per month and HRA of ₹24,000 per month. The employee pays ₹22,000 monthly rent for a house in Bengaluru and has no relevant DA or turnover-based commission. For a full year, salary for HRA purposes is ₹7,20,000, actual HRA is ₹2,88,000 and rent paid is ₹2,64,000.
The three figures are: actual HRA of ₹2,88,000; rent minus 10% of salary, or ₹2,64,000 minus ₹72,000 = ₹1,92,000; and 40% of salary for a non-metro location, or ₹2,88,000. The lowest is ₹1,92,000, so that is the HRA exemption on these assumptions. The remaining HRA is taxable salary.
Why location matters
The 50% factor is limited to the four cities specified in the HRA rule: Mumbai, Calcutta, Delhi and Chennai. Other locations use 40%. Employees should not assume that every large metropolitan area qualifies for the 50% factor. The relevant location is the rented accommodation for which HRA exemption is being computed.
What documents should an employee keep?
The Income Tax Department's ITR-2 FAQ for AY 2026-27 says that a taxpayer living in rented premises needs rent-paid receipts for HRA calculation where those receipts were not submitted to the employer. The Department's salary guidance also states that the landlord's PAN must be reported to the employer where rent paid exceeds ₹1,00,000.
A practical HRA file should therefore preserve the rent agreement where available, rent receipts, bank or other payment evidence, landlord details and PAN where applicable, salary slips and Form 16. These records help reconcile what the employer considered during TDS with what is ultimately claimed in the return.
Can HRA be claimed in the ITR if proof was not submitted to the employer?
Failure to submit rent proof to the employer does not necessarily mean the eligible exemption disappears. The Department's ITR-2 FAQ specifically contemplates using rent-paid receipts for HRA calculation where they were not submitted to the employer. The taxpayer should recompute the eligible exemption, report salary correctly in the return and retain supporting evidence.
The AY 2026-27 ITR-2 validation rules also require the section 10(13A) table in Schedule Salary to be completed for an HRA exemption claim and validate the claim against the lowest of the three statutory amounts.
What if rent or salary changes during the year?
Where salary, HRA, rent, employment or accommodation changes during the year, a single annual average can produce a misleading result. A safer approach is to compute the exemption for the relevant periods using the actual salary, HRA, rent and city applicable to each period, then aggregate the eligible amounts. This is especially important when an employee relocates between a specified metro and a non-metro city or receives a mid-year salary revision.
Common HRA mistakes
- Claiming the entire HRA received: the exemption is the lowest of the three Rule 2A amounts, not automatically the allowance shown on the payslip.
- Using gross salary in the formula: use the prescribed salary components for the HRA calculation.
- Claiming HRA without paying rent: the Department states that HRA is fully taxable where no rent is paid.
- Using 50% for any metro-like city: the 50% factor is tied to the specified cities in the rule.
- Claiming HRA under the new tax regime: section 10(13A) exemption is not available there.
- Ignoring landlord PAN requirements: where annual rent paid exceeds ₹1,00,000, the Department requires the landlord's PAN to be reported to the employer.
Practical HRA checklist
- Confirm that HRA is actually part of salary and rent is genuinely paid.
- Confirm that the old tax regime is being used for the claim.
- Identify salary for Rule 2A purposes rather than using gross CTC.
- Calculate all three limits and take the lowest.
- Split the calculation into periods if salary, rent or city changes.
- Reconcile the result with Form 16 and the HRA table in the ITR.
- Keep rent receipts and supporting payment records, and provide landlord PAN to the employer where the prescribed rent threshold is crossed.
Practical takeaway
HRA exemption is a formula-based salary exemption, not a blanket deduction for rent. Start by confirming the tax regime and actual rent payment, use the correct salary definition, calculate all three Rule 2A limits and retain evidence that supports the claim. A period-wise calculation is the safest approach when salary, rent or location changes during the year.
