How HRA Exemption Works: Understanding the Rules and Calculations

House Rent Allowance (HRA) is one of the most powerful tax-saving components in a salaried person's payslip – and also one of the most misunderstood. I regularly meet people who either under-claim HRA (and pay extra tax) or make mistakes that can trigger questions during scrutiny. In this guide, I'll walk you through exactly how HRA exemption works, with practical salary slip examples and real-life situations.

If you get HRA as part of your salary and you pay rent, the Income Tax Act allows you to claim a tax exemption on part of that HRA. The idea is simple – the government recognizes that rent is a genuine expense and gives relief for it. But the formula, metro vs non-metro rules, and special cases (like staying with parents) can be confusing unless you see them broken down clearly.

Basic Conditions for Claiming HRA Exemption

You can generally claim HRA exemption if:

• You are a salaried employee (HRA component in salary)
• You actually pay rent for your accommodation
• You live in a house you do not own (or specific edge cases like paying rent to parents with proper documentation)

You cannot claim HRA if:

• You don’t receive HRA in your salary structure
• You live in your own house and do not pay rent
• You’re self-employed (in that case, you use Section 80GG rules instead, which are different)

The HRA Exemption Formula (Old Regime)

Under the old tax regime, the exempt portion of HRA is the minimum of the following three values:

1. Actual HRA received from employer
2. Rent paid – 10% of basic salary (plus DA, if applicable for retirement benefits)
3. 40% of basic salary (50% if you live in a metro city like Mumbai, Delhi, Kolkata, Chennai)

This means you must compute all three numbers and pick the lowest as the exempt HRA. The remaining HRA (if any) is taxable.

What Counts as Salary for HRA?

For HRA purposes, “salary” generally means:

• Basic salary
• Dearness allowance (if it counts for retirement benefits)
• Commission, if it is a fixed percentage of turnover achieved by the employee

Bonuses, overtime, and most allowances are not included in this salary figure for HRA calculation.

Example: HRA Calculation for Non-Metro City

Let’s say:

• Basic salary: ₹50,000 per month
• HRA received: ₹20,000 per month
• DA (for retirement benefits): ₹0
• Rent paid: ₹18,000 per month
• City: Jaipur (non-metro)

Annual figures:

• Basic salary = ₹6,00,000
• HRA received = ₹2,40,000
• Rent paid = ₹2,16,000

Now calculate the three values:

1. Actual HRA received = ₹2,40,000
2. Rent paid – 10% of salary = ₹2,16,000 – (10% of ₹6,00,000 = ₹60,000) = ₹1,56,000
3. 40% of salary (non-metro) = 40% of ₹6,00,000 = ₹2,40,000

The minimum of these three is ₹1,56,000.

So:

• Exempt HRA = ₹1,56,000
• Taxable HRA = ₹2,40,000 – ₹1,56,000 = ₹84,000

Your salary computation for tax will show only ₹84,000 HRA as taxable; the rest is exempt.

Example: HRA Calculation for Metro City

Now take the same example but city = Mumbai (metro):

Numbers remain the same except the 40% becomes 50%:

1. Actual HRA received = ₹2,40,000
2. Rent paid – 10% of salary = ₹1,56,000 (same as before)
3. 50% of salary (metro) = 50% of ₹6,00,000 = ₹3,00,000

Minimum of these:

• Min(₹2,40,000, ₹1,56,000, ₹3,00,000) = ₹1,56,000

In this specific example, metro vs non-metro didn’t change the exemption because the limiting factor was “rent paid – 10% of salary”. In many real cases, though, the metro advantage can allow a slightly higher exemption.

Staying with Parents and Claiming HRA

One of the most common practical questions is: “Can I pay rent to my parents and claim HRA?” The law does not explicitly prohibit this, but there are conditions:

• You must actually pay rent to your parents (through bank transfer, not just on paper)
• There should be a simple rent agreement between you and your parents
• Your parents should declare this rent as income in their returns (and pay tax if applicable)

If these conditions are met, you can claim HRA exemption just like any other tenant. However:

• If the arrangement is purely on paper and money is just moving in a circle, it may not stand scrutiny
• If your parents fall in a very low tax bracket, this can still be an efficient family-level tax planning strategy

No Rent Agreement / Cash Payments – Is HRA Still Allowed?

In practice, many landlords don’t sign formal agreements or insist on cash payments. For HRA:

• If annual rent exceeds ₹1,00,000, you are required to provide landlord PAN (or declaration if not available)
• Employers typically ask for rent receipts and sometimes rental agreement copies

If you genuinely pay rent but don’t have a formal agreement:

• Try to at least maintain monthly rent receipts with revenue stamps for cash payments
• Prefer digital payments (UPI, bank transfer) to create a clear trail
• If your employer accepts these documents, you can claim HRA through payroll; otherwise, you can still claim it directly while filing ITR (but keep documentation ready)

HRA When You Own a House

You generally cannot claim HRA for a self-occupied property that you own. But there are valid scenarios:

• You own a house in your hometown but work and rent in another city → You can claim HRA for the rented house, and simultaneously claim home loan benefits (subject to conditions) on the owned property
• You own a house in the same city but it’s far from your workplace or on rent to someone else, and you rent another place closer to work – this is a grey area and may attract more scrutiny; you should be able to justify the arrangement

Always be ready with documentation and a reasonable explanation if your scenario is unusual.

HRA Under the New Tax Regime

Under the new tax regime, most exemptions and deductions (including HRA exemption) are not available in the standard form. The new regime offers lower slab rates but sacrifices popular exemptions like:

• HRA
• LTA
• Standard deduction (depending on latest rules)
• Many 80C-type deductions

So:

• If your HRA exemption is large and you actively use 80C/80D/etc., the old regime may still be better
• If you have minimal deductions and HRA benefit is small, the new regime might win

Use our Old vs New Tax Regime Calculator to run your numbers before deciding.

Documentation and Proofs Employers Usually Ask For

Most employers will ask for:

• Rent receipts (monthly or quarterly)
• Rent agreement (optional but increasingly common)
• Landlord PAN if annual rent exceeds ₹1,00,000

Even if your employer doesn’t ask for all proofs, you should keep:

• Rent receipts
• Bank statements showing rent payments
• Rent agreement or signed letter from landlord

These are crucial if your return is later selected for scrutiny.

Best Practices for HRA Planning

From years of seeing HRA cases, here are best practices:

• Don’t fabricate rent – only claim what you genuinely pay
• Ensure your landlord’s details (name, PAN) are accurate
• If paying parents, do it properly – agreement, bank transfers, and correct reporting in their returns
• Review your Form 16 to ensure HRA is reflected correctly
• If employer has not allowed full HRA during the year, you can still re-compute at ITR filing time and claim the correct exemption

Frequently Asked Questions (FAQs)

Q1: Can I claim HRA and home loan interest deduction together?

A: Yes, if you live in a rented house (usually in one city) and own a house elsewhere (often in another city, or even in the same city with valid reasons). Both HRA exemption and home loan deductions can coexist as long as facts support it.

Q2: Is landlord PAN mandatory for all HRA claims?

A: PAN is generally required if annual rent exceeds ₹1,00,000. For lower amounts, employers may not insist on PAN but will still need receipts.

Q3: Can I claim HRA if I pay rent but don’t get HRA from employer?

A: No, the HRA exemption under Section 10(13A) is specifically linked to HRA received as part of salary. If you don’t get HRA at all, you might look at Section 80GG, which has different conditions and limits.

Q4: How do I correct HRA if my employer calculated it wrongly?

A: You can recompute your HRA exemption correctly while filing your ITR, even if your employer’s Form 16 used a different figure. Keep documentation ready in case of queries.

Q5: Can both husband and wife claim HRA for the same house?

A: It’s possible if both are genuinely paying rent and it’s structured properly, but it’s likely to draw scrutiny. Typically, one spouse claims HRA for the full rent; splitting is usually not necessary unless there are specific reasons.

Using Our Tools to Validate Your HRA Decision

Before finalizing your tax regime and HRA claim:

1. Use the Income Tax Calculator to compare your tax under old vs new regimes with and without HRA
2. Use the Old vs New Tax Regime Calculator to see if your total deductions (including HRA) justify staying in the old regime

These tools help you avoid guesswork and make a clean, numbers-backed choice.

Final Thoughts

HRA is one of the easiest ways for salaried individuals to reduce tax legally, as long as you understand the rules and maintain basic documentation. Once you know the formula and see how the three conditions work, the calculation becomes mechanical.

The right approach is to:

• Declare your rent and HRA details properly to your employer
• Keep receipts and bank proofs
• Use our calculators to decide between old and new regimes
• Re-check HRA at ITR time if needed

Take 20–30 minutes once a year to review your salary structure and HRA computation – the tax saved each year will compound into a significant amount over your working life.

Disclaimer: HRA rules, limits, and interpretations can evolve based on Finance Acts and CBDT circulars. This guide is based on current law and typical employer practices. Always verify your specific situation with your HR or a qualified tax professional, especially for complex cases (multiple houses, partial-year rent, or unusual arrangements).