HRA Exemption: Save Tax on Your House Rent
If you are a salaried employee living in rented accommodation and your salary includes House Rent Allowance (HRA), a part of that allowance can be tax-free. The exempt amount is not fixed — it depends on your salary, your actual rent, and the city you live in. Understanding the formula lets you plan how much rent you can legitimately claim.
In this article
The three-part formula
The HRA exemption is the least of these three amounts:
- The actual HRA received from your employer,
- Rent actually paid minus 10% of (basic salary + dearness allowance),
- 50% of (basic + DA) if you live in a metro city (Delhi, Mumbai, Kolkata, Chennai), or 40% in any other city.
The exempt part of HRA is removed from your taxable salary. The rest of the HRA you receive is added to your income and taxed normally.
Worked example
Amit lives in Bengaluru (non-metro). His basic salary is ₹8,00,000, he receives HRA of ₹2,40,000, and pays rent of ₹1,80,000 a year.
| Computation | Amount (₹) |
|---|---|
| A. HRA received | 2,40,000 |
| B. Rent paid (1,80,000) − 10% of basic (80,000) | 1,00,000 |
| C. 40% of basic (non-metro) | 3,20,000 |
| Exemption (least of A, B, C) | 1,00,000 |
Amit can exempt ₹1,00,000 of his HRA. The remaining ₹1,40,000 is taxable. If his rent were higher, the exemption could increase — up to the caps in A and C.
Metro vs non-metro difference
The 50% vs 40% cap is a major reason people pay different tax on identical salaries. Someone in Mumbai gets a higher ceiling (50% of basic) than a colleague in Pune (40%), even at the same salary. If you relocate between a metro and a non-metro city, your exemption changes accordingly.
Documents you need
- Rent receipts — you typically submit these to your employer every year.
- PAN of your landlord — required if your annual rent exceeds ₹1,00,000.
- Form 12BB, if your employer asks you to declare your rent payments.
No HRA component? If your salary has no HRA, you may still claim a deduction for rent under Section 80GG — limited to ₹5,000 per month or 25% of total income, whichever is less, and only if you have no HRA and no self-occupied property.
Special situations
- Paying rent to parents or family: Allowed, but the transaction must be genuine, documented, and rent must be reported as their income.
- Renting while owning a home elsewhere: You can claim HRA for the city you work in, but check that your own home isn't let out or claimed as self-occupied in a conflicting way.
- New regime: HRA exemption is not available under the new tax regime — a big reason many renters stay with the old regime.