What is HRA and How to Calculate HRA Exemption

If you are a salaried employee paying rent, House Rent Allowance (HRA) is one of the most valuable tax-saving components in your salary. Yet, many employees either under-claim their HRA exemption or miss it entirely because they do not know how the three-condition formula works.

What is HRA (House Rent Allowance)?

House Rent Allowance, commonly known as HRA, is a salary component paid by employers to help employees meet the cost of rented accommodation. It forms a standard part of the Cost to Company (CTC) structure for most salaried employees in India.

Under Section 10(13A) of the Income Tax Act, 1961, a portion of the HRA you receive from your employer is exempt from tax  provided you are actually living in rented accommodation and you opt for the old tax regime when filing your Income Tax Return (ITR).

Key points to remember about HRA:

• HRA is paid by employers  it is not self-claimed by individuals.
• It is available only under the old tax regime. Under the new tax regime, HRA cannot be claimed.
• You must be paying actual rent to claim the exemption.
• If you live in your own house or do not receive HRA as part of your salary, you may still claim rent-related relief under Section 80GG (explained below).

Who is Eligible to Claim HRA Exemption?

Not everyone can claim HRA. The following table summarises eligibility:

How is HRA Exemption Calculated? The Three-Condition Formula

The HRA exemption amount is always the lowest of the following three values:

Important: "Salary" for HRA purposes means Basic Salary + Dearness Allowance (the portion forming part of retirement benefits) + any commission earned as a fixed percentage of turnover. It does not include HRA itself, special allowances, bonuses, or other components.

New 2025-26 Update: 8 Cities Now Qualify for 50% HRA Exemption

Under the original Income Tax Act, 1961, only four cities qualified for the higher 50% HRA exemption rate  Delhi, Mumbai, Kolkata, and Chennai. All other cities were treated as non-metro cities, qualifying for only 40%.

Following the Union Budget 2025 and the Income Tax Rules, 2026, four more cities have been added to the metro list. From FY 2025-26 (AY 2026-27), the following 8 cities qualify for 50% HRA exemption:

• Delhi
• Mumbai
• Kolkata
• Chennai
• Bengaluru (NEW)
• Pune (NEW)
• Hyderabad (NEW)
• Ahmedabad (NEW)

If you are a salaried employee living in Bengaluru, Pune, Hyderabad, or Ahmedabad, this change directly benefits you  your HRA exemption could be significantly higher than in previous years.

HRA Calculation  Step-by-Step Example

To understand how the formula works in practice, let us walk through a general illustration using the three-condition approach.

Example: Salaried Employee in a Metro City

Assume a salaried employee receives an HRA component from their employer, pays monthly rent, and has a basic salary. To find the HRA exemption:

• Calculate 50% of the annual basic salary (metro city).
• Calculate total annual rent paid minus 10% of annual basic salary.
• Note the actual HRA received during the year.
• The exemption is the lowest of these three amounts.
• The remaining HRA (above the exempt amount) is added back to taxable income.

Note: The specific rupee amounts in the above example will vary based on your actual salary structure. Use an online HRA calculator or consult your HR/payroll team to work out the precise figure for your case.

Example: Salaried Employee in a Non-Metro City

For a non-metro city, the calculation follows the same three steps  except that Condition 2 uses 40% of basic salary instead of 50%. This typically results in a lower exempt amount, and the remaining HRA becomes taxable income at the applicable slab rate.

New Tax Regime: HRA Not Available

If you have opted for the new tax regime, HRA exemption under Section 10(13A) does not apply. The entire HRA received is treated as taxable income. The new regime offers lower tax slab rates but removes most deductions and exemptions, including HRA.

HRA in the Old Tax Regime vs New Tax Regime

Recommendation: If you pay significant rent and have other qualifying deductions (home loan interest, 80C investments), the old tax regime is likely more beneficial. Run the comparison before choosing at the start of the financial year  the choice affects your entire year's tax liability.

Documents Required to Claim HRA Exemption

While you do not submit these documents with your ITR, you must provide them to your employer (for Form 12BB submission) and retain them in case of any income tax notice:

Rent Receipts: Monthly rent receipts signed by your landlord. Essential for the entire claim period.

Rent / Lease Agreement: Your tenancy agreement showing rent amount, address, landlord details, and tenure.

Form 12BB: Declaration to your employer for TDS deduction  covers HRA, LTA, home loan interest, and 80C.

Bank Transfer Records: Proof of rent payment (bank statement, UPI transaction history) strongly recommended.

Landlord's PAN: Mandatory if total annual rent exceeds Rs 1,00,000. Landlord must furnish PAN or sign a declaration of non-availability.

Salary Slip: Confirms the HRA component in your salary structure.

Special Cases: When Can You Still Claim HRA?

1. Paying Rent to Your Parents

Yes, you can pay rent to your parents and claim HRA  provided your parents own the property and declare the rent received as income in their own ITR. This is a legally valid tax planning strategy. Maintain proper rent receipts and, if the rent exceeds Rs 1 lakh per year, collect your parents' PAN.

2. Claiming HRA and Home Loan Interest Together

If you own a house (with a home loan) in one city but are posted to or working in another city and paying rent there, you can claim both HRA exemption and home loan interest deduction (under Section 24(b)) simultaneously. You need to demonstrate that the two properties are in different cities for employment reasons.

3. Paying Rent to a Spouse

No the Income Tax Department does not permit HRA exemption claims for rent paid to a spouse. This is treated as a non-arm's-length transaction.

Section 80GG: For Those Without HRA in Their Salary

If you are self-employed or salaried but your employer does not provide an HRA component, you can claim a deduction under Section 80GG of the Income Tax Act.

The deduction under Section 80GG is the lowest of:

• Rs 5,000 per month (Rs 60,000 per year)
• 25% of total income before the 80GG deduction
• Actual rent paid minus 10% of total income

Section 80GG is available only under the old tax regime and cannot be claimed if you own a house in the same city where you are working.

Make Your Money Work Harder  Beyond HRA

Claiming your full HRA exemption is a great first step in tax planning. But your savings can go further. AU Small Finance Bank offers a range of tools to help your money grow:

• Savings Account: Earn attractive interest rates on your savings ideal for parking your monthly savings after rent.
• Tax-Saving Fixed Deposits: Lock in your 80C investments with AU Small Finance Bank's tax-saving FD options and reduce your taxable income further.
• Digital Banking: Manage rent payments, track savings, and plan your taxes all from the AU 0101 app.

Frequently Asked Questions (FAQs)

1: How is HRA calculated from salary?

A: HRA exemption is the lowest of: (1) actual HRA received, (2) 50% or 40% of basic salary depending on city, and (3) rent paid minus 10% of basic salary. The remaining HRA above this limit is taxable.

2: Is HRA available under the new tax regime?

A: No. HRA exemption under Section 10(13A) is available only if you opt for the old tax regime. Under the new tax regime, the full HRA received is taxable.

3: Which cities qualify for 50% HRA exemption in 2026?

A: Eight cities now qualify: Delhi, Mumbai, Kolkata, Chennai, Bengaluru, Pune, Hyderabad, and Ahmedabad. This expanded list applies from FY 2025-26 per the Income Tax Rules, 2026.

4: Can I claim HRA if I live with my parents?

A: Yes, provided your parents own the property. You must pay them actual rent, obtain signed rent receipts, and your parents must show the rental income in their ITR.

5: What is the landlord PAN requirement for HRA?

A: If your total annual rent payments exceed Rs 1,00,000, you must collect your landlord's PAN and submit it to your employer (Form 12BB). If the landlord does not have a PAN, a self-declaration is required.

6: Can I claim both HRA and home loan tax benefits together?

A: Yes if your rented property and owned property are in different cities. You can claim HRA exemption for the city where you pay rent and home loan interest deduction (Section 24(b)) for the property you own elsewhere.

7: What is Section 80GG?

A: Section 80GG lets self-employed individuals and salaried employees without HRA in their CTC claim a deduction for rent paid, up to Rs 60,000 per year or 25% of total income or rent minus 10% of income  whichever is lowest. Available only under the old tax regime.

8: What happens if I don't submit rent receipts?

A: If you do not submit rent proof to your employer by the deadline, your employer will deduct TDS on the full HRA. You can still claim the exemption when filing your ITR  but maintaining the documentation is essential in case of any scrutiny.

9: Can I pay rent to my spouse and claim HRA?

A: No. The Income Tax Department disallows HRA exemption for rent paid to a spouse.

10: Is HRA applicable to self-employed individuals?

A: No. Self-employed individuals do not receive HRA from an employer. They can however claim a deduction under Section 80GG for rent paid.

Disclaimer: Tax laws are subject to change. Please consult a tax advisor for personalised guidance. Interest rates and terms are subject to change. Please visit the official AU Small Finance Bank website or contact our nearest branch for the latest offers.