Key Highlights
- HRA exemption is available only under the Old Tax Regime — not available in the New Tax Regime (Section 202)
- HRA exemption is computed under Schedule II, Income Tax Act, 2025 (corresponds to Section 10(13A) of ITA 1961)
- Exempt HRA = Least of 3 conditions: Actual HRA received, Rent paid minus 10% of salary, or 40%/50% of salary
- Metro cities (Delhi, Mumbai, Chennai, Kolkata): 50% of salary for HRA exemption; Non-metro: 40%
- You must actually pay rent to claim HRA — owner-occupiers cannot claim HRA
- If annual rent exceeds ₹1,00,000: landlord's PAN must be furnished to employer
- Rent paid to parents is valid for HRA — but lease must be genuine and rent must be actually transferred
1. Overview
HRA or House Rent Allowance is a component of salary that employers pay to help employees meet their housing costs. When an employee lives in rented accommodation, a portion of the HRA received is exempt from income tax under specific rules.
Under the Income Tax Act, 2025, the HRA exemption has been moved from Section 10(13A) of the old Act to Schedule II of the new Act. The rules, calculation method, and limits remain exactly the same. The only major change is that this exemption is NOT available if you opt for the New Tax Regime under Section 202.
For millions of salaried individuals paying significant rent — especially in metro cities — the HRA exemption can save ₹50,000 to ₹2,00,000 or more in taxes annually. This makes the Old Regime worth considering for high-rent urban employees.
2. The Three-Condition Formula for HRA Exemption
The amount of HRA exempt from tax is the least of the following three amounts:
- Actual HRA received from employer during the year
- Rent paid minus 10% of salary (Basic + DA) for the period of renting
- 40% of salary (50% if house is in Delhi, Mumbai, Kolkata, or Chennai)
In this formula, "Salary" means Basic Salary + Dearness Allowance (if it forms part of retirement benefits). HRA and other allowances are NOT included in this salary definition.
3. HRA Calculation Examples
All examples below are illustrative only.
Example 1: Employee in Mumbai
| Particulars | Amount (₹) |
|---|---|
| Basic Salary per month | 50,000 |
| HRA received per month | 25,000 |
| Rent paid per month | 22,000 |
| Annual Basic Salary | 6,00,000 |
| Annual HRA Received | 3,00,000 |
| Annual Rent Paid | 2,64,000 |
Calculation of exempt HRA:
- Condition 1: Actual HRA = ₹3,00,000
- Condition 2: Rent paid − 10% of salary = ₹2,64,000 − ₹60,000 = ₹2,04,000
- Condition 3: 50% of salary (Metro city) = ₹3,00,000
- Exempt HRA = Least of above = ₹2,04,000
- Taxable HRA = ₹3,00,000 − ₹2,04,000 = ₹96,000
Example 2: Employee in Pune (Non-Metro)
| Particulars | Amount (₹) |
|---|---|
| Basic Salary per month | 40,000 |
| HRA received per month | 18,000 |
| Rent paid per month | 15,000 |
| Annual Basic Salary | 4,80,000 |
| Annual HRA Received | 2,16,000 |
| Annual Rent Paid | 1,80,000 |
Calculation:
- Condition 1: ₹2,16,000
- Condition 2: ₹1,80,000 − ₹48,000 = ₹1,32,000
- Condition 3: 40% of ₹4,80,000 = ₹1,92,000
- Exempt HRA = ₹1,32,000
- Taxable HRA = ₹2,16,000 − ₹1,32,000 = ₹84,000
4. Metro vs Non-Metro: Which Cities Are Metro?
Under Schedule II of the Income Tax Act, 2025 and Rule 2A of Income Tax Rules, 1962, the following four cities qualify as "metro" for the 50% HRA computation:
- Delhi (and NCR)
- Mumbai (and surrounding areas including Navi Mumbai, Thane)
- Kolkata
- Chennai
All other cities (Bengaluru, Hyderabad, Pune, Ahmedabad, Jaipur, etc.) attract the 40% limit. This is a statutory definition and has not been updated to include newer major cities despite multiple representations.
5. Conditions for Claiming HRA Exemption
- You must be a salaried employee receiving HRA as part of your CTC
- You must actually pay rent — you cannot claim HRA if you live in your own house or in rent-free accommodation
- You must be filing under the Old Tax Regime — HRA is not available in the new regime
- If rent exceeds ₹1,00,000 per year (₹8,333 per month), you must furnish the landlord's PAN to your employer
- Maintain rent receipts as documentary evidence
6. Can I Claim HRA While Paying Rent to Parents?
Yes — paying rent to parents is a valid arrangement for claiming HRA, subject to these conditions:
- A formal rent agreement must be executed (registered preferably)
- Rent must actually be paid by bank transfer or cheque — not cash (especially above ₹2 lakh)
- Parents must report this rent income in their own ITR
- The property must actually be owned by the parents (verified from title documents)
- This has been confirmed as valid by CBDT Circular No. 08/2013
7. What if I Don't Receive HRA but Pay Rent?
If your employer does not provide HRA as a salary component but you live in rented accommodation, you can still claim a deduction under Section 122 of ITA 2025 (equivalent to Section 80GG of ITA 1961) subject to conditions:
- You, your spouse, minor child, or HUF must not own a house at the place of work
- Deduction = least of: ₹5,000 per month; 25% of total income; or rent paid minus 10% of total income
- This deduction is available in the Old Regime only
8. HRA Exemption and Home Loan Together?
You can claim both HRA exemption and home loan interest deduction simultaneously — provided:
- You are living in rented accommodation (paying rent)
- You own a house in a different city and have a home loan on it
- Both claims are legitimate and you can demonstrate both
CBDT has accepted this position and it is upheld by multiple judicial decisions. However, you cannot claim both for the same property in the same city.
9. Documents Required for HRA Claim
- Rent receipts (month-wise) or rent agreement
- Bank statements showing rent transfers
- Landlord's PAN (mandatory if annual rent > ₹1 lakh)
- Declaration form (Form 12BB) submitted to employer
- In case of rent to parents: registered rent agreement + parent's property documents
10. Latest Updates Under ITA 2025
- HRA exemption moved from Section 10(13A) of ITA 1961 to Schedule II of ITA 2025
- All conditions and calculation formula remain unchanged
- HRA is NOT available under the New Tax Regime (Section 202)
- Section 80GG equivalent (Section 122) available for non-HRA receivers under Old Regime only
- No change in the list of metro cities (Delhi, Mumbai, Chennai, Kolkata)
11. HRA vs New Regime: Which Saves More?
Illustrative comparison only. For an employee in Mumbai with basic salary ₹60,000/month, HRA ₹25,000/month, rent ₹22,000/month:
- HRA exemption under old regime ≈ ₹1,56,000 per year
- Additional old regime standard deduction loss vs new regime = ₹25,000 (₹75K new vs ₹50K old)
- Old regime 80C deduction (if fully used) = ₹1,50,000
- Total additional deductions in old regime = ₹2,81,000
- At 30% tax bracket, these deductions save ≈ ₹84,300 more in old regime vs new regime
- This must be compared against the lower slab rates in new regime at that income level
TaxClue recommends running a personalised computation for your specific salary structure and rent amount before deciding.
12. Penalties for Wrong HRA Claims
- Claiming HRA in new regime → deduction disallowed; tax demand + interest
- Fabricating rent receipts or fake PAN of landlord → Section 439 penalty (200% of evaded tax) + prosecution under Section 481 of ITA 2025
- Failure to furnish landlord PAN when rent > ₹1 lakh → HRA claim may be rejected by employer; TDS not deducted correctly
13. Why TaxClue
HRA calculation involves multiple conditions and city-specific rules. TaxClue ensures your HRA is computed correctly, your Form 16 reflects the right exemption, and your ITR is filed with the optimal regime choice (factoring in HRA benefit). Contact us for salaried ITR filing and HRA advisory.
14. Resources & Checklist
- ☐ Confirm you are in Old Tax Regime to claim HRA
- ☐ Collect all 12 months' rent receipts
- ☐ Check if city is metro (50%) or non-metro (40%)
- ☐ Calculate HRA using the 3-condition formula
- ☐ Obtain landlord's PAN if annual rent > ₹1 lakh
- ☐ Submit Form 12BB to employer with rent details
- ☐ Verify HRA exemption in Form 16 before filing ITR
15. Contact Us
HRA is one of the largest tax-saving tools for salaried employees in rented accommodation. Make sure you claim the correct amount with proper documentation. Contact us for ITR filing, HRA optimisation, and complete tax advisory under the Income Tax Act, 2025.