HRA Exemption Rules: How to Calculate, Prove, and Claim Without Inviting a Notice

If you are a salaried employee paying rent, House Rent Allowance is probably the largest tax-free component on your payslip — and also the most misunderstood. Many salaried readers assume the entire HRA in their salary structure is tax-free. It is not. The exempt portion is the lowest of three calculated amounts under Section 10(13A) of the Income Tax Act 1961, and the rest is fully taxable. The picture has just shifted: the new Income Tax Rules 2026, notified under the Income Tax Act 2025, expand the 50% HRA city list from 4 to 8 cities — but only from FY 2026-27 onwards. For the year you are filing now, the old rules still apply. This post explains how the exemption is calculated under both frameworks, what proof you must keep, how the choice of regime affects you, and the five mistakes that quietly turn a clean claim into a tax notice.

Quick answer

Your HRA exemption is the lowest of three figures: actual HRA received, rent paid minus 10% of basic salary, and 50% of basic salary in metro cities (40% in non-metros). For FY 2025-26, only Delhi, Mumbai, Kolkata, and Chennai count as metros. From FY 2026-27, the new Income Tax Rules 2026 add Bengaluru, Hyderabad, Pune, and Ahmedabad to the 50% list. The exemption is available only under the old tax regime — not under the new regime.

Before claiming HRA, check:

1. Which financial year are you claiming for — FY 2025-26 or FY 2026-27 onwards?
2. Have you opted for the old tax regime for that year?
3. Are you actually paying rent, with receipts, bank trail, and landlord PAN where required?

How HRA exemption is calculated

The HRA exemption rules under Section 10(13A) of the Income Tax Act 1961 work on a “lowest-of-three” formula. Whichever number is smallest becomes your exempt amount. The rest of the HRA in your CTC is added to taxable salary.

The three figures are:

1. Actual HRA received during the year from your employer.
2. Rent paid minus 10% of basic salary (basic salary plus dearness allowance, if it forms part of retirement benefits).
3. A percentage of basic salary, where the percentage and the city list depend on the financial year:
   • For FY 2025-26 (AY 2026-27) — governed by the Income Tax Act 1961 and Income Tax Rules 1962 — the 50% rate applies only in Delhi, Mumbai, Kolkata, and Chennai. Every other city, including Bengaluru, Hyderabad, Pune, and Ahmedabad, is capped at 40% of basic. For FY 2026-27 onwards — governed by the Income Tax Act 2025 and the new Income Tax Rules 2026 — four more cities are added to the 50% list: Bengaluru, Hyderabad, Pune, and Ahmedabad. So the metro list expands from 4 to 8. All other locations remain at 40%.

A worked example helps. Take Priya, a software engineer in Bengaluru:

• Basic salary: ₹6,00,000 per year
• HRA component: ₹2,40,000 per year
• Rent paid: ₹2,16,000 per year (₹18,000 per month)

For FY 2025-26, the three figures are:

• Actual HRA received: ₹2,40,000
• Rent paid minus 10% of basic: ₹2,16,000 − ₹60,000 = ₹1,56,000
• 40% of basic (Bengaluru is non-metro for FY 2025-26): ₹2,40,000

The lowest is ₹1,56,000. So Priya’s HRA exemption for FY 2025-26 is ₹1,56,000.

For FY 2026-27, the third leg changes to 50% of basic — ₹3,00,000 — because Bengaluru is now in the 50% list. The lowest of the three is still ₹1,56,000, so in Priya’s case the result is the same. The expansion helps only when the third leg is the binding constraint — typically high-rent professionals in newly-added cities whose rent-minus-10% figure is large. Run the math both ways before assuming the new rule changes your number.

Use the calculator below to compute your HRA exemption for any year — it handles both the FY 2025-26 rules and the new Income Tax Rules 2026, and shows you side-by-side whether the expanded 8-city list actually changes your number.

When you pay no rent or live with parents

If you live in your own house, or in an accommodation where you pay no rent, the HRA exemption is zero. The full HRA is taxable. If you live with your parents and genuinely pay rent to them, you can claim HRA — but the rent must be real, supported by bank transfers, and your parents must offer the rent as income in their return. A token entry will not survive scrutiny. From FY 2026-27, the Income Tax Rules 2026 also require you to disclose your relationship with the landlord when claiming HRA — a transparency measure aimed squarely at inflated rent-to-relative claims.

Proof you must keep on file

This is where most claims fall apart. The rules expect documentation, not declarations.

Rent receipts. A receipt for every month of rent claimed, signed by the landlord, with the landlord’s name, address, the amount, the period covered, and a revenue stamp where the receipt is for cash payment above ₹5,000. Most employers ask for receipts at year-end before issuing Form 16.

Rent agreement. A registered or notarised rent agreement is strongly preferred. While not legally mandatory for the HRA claim itself, an agreement establishes the genuineness of the tenancy and is the first thing an assessing officer asks for if your claim is questioned.

Landlord PAN. If the total rent paid in the financial year exceeds ₹1,00,000, you must report the landlord’s PAN to your employer. If the landlord does not have a PAN, you need a signed declaration from the landlord stating so, along with the landlord’s name and address. Submitting a fake or random PAN is a frequent and easily detected error — the department cross-checks landlord PANs against the rent claimed.

Bank trail. Pay rent through bank transfer, UPI, or cheque. Cash rent is not banned, but it is harder to defend. A clean monthly transfer of the same amount on or near the same date every month is the strongest evidence of a real tenancy.

TDS on rent above ₹50,000 per month. If your monthly rent exceeds ₹50,000, you are required to deduct TDS at 2% under Section 194-IB and deposit it through Form 26QC. Missing this deduction does not block the HRA claim, but it creates a separate compliance gap that the department now actively flags.

HRA exemption rules and the new tax regime

This is the most important point in the post.

The HRA exemption under Section 10(13A) is available only under the old tax regime. Under the new tax regime, which is the default regime from FY 2023-24 onwards, HRA is fully taxable as part of salary. There is no exemption, regardless of how much rent you pay or where you live.

So the regime choice directly drives the value of the HRA claim. If your HRA exemption works out to a meaningful number — say ₹1.5 lakh or more — staying on the old regime may be financially better, even after losing the higher standard deduction and lower slab rates of the new regime. If your HRA exemption is small, or your salary structure has very little HRA, the new regime may give you a larger overall tax saving despite losing this exemption.

The choice is annual for salaried employees and must be communicated to the employer at the start of the financial year so TDS is computed correctly. If you forget to communicate the choice, the employer defaults to the new regime, and HRA is taxed in full from month one. Switching back at filing is possible but creates a refund situation.

If you are unsure which regime works out cheaper for your salary structure, run the numbers through our old vs new tax regime calculator before locking the choice with your employer.”

What to do at filing time

The practical workflow at the time of filing is straightforward, but every step matters.

If your employer has already given effect to HRA in Form 16, the exempt amount is reflected in salary income and you usually don’t recompute. But if HRA was not given effect to — for example, because you submitted proofs late or switched jobs mid-year — you can claim the exemption directly in your ITR by reducing the exempt portion from gross salary in the salary schedule. Keep the calculation worksheet, receipts, and rent agreement in your file even if they are not uploaded. The department can call for them up to several years later.

5 common HRA mistakes that invite a notice

Most HRA notices come from a small set of repeating errors. These are the ones that consistently get flagged.

1. Claiming HRA while staying on the new tax regime. The HRA exemption rules require the old regime. Claiming HRA in your ITR while your Form 16 reflects new regime tax computation is one of the easiest mismatches for the system to catch.
2. Paying rent to a spouse and claiming HRA. Courts have generally disallowed this where the spouse is not the actual property owner or where there is no genuine landlord-tenant relationship. Even where the spouse owns the property independently, the claim invites scrutiny and needs a registered agreement and clean bank transfers.
3. Submitting a wrong or random landlord PAN. When annual rent crosses ₹1,00,000, the landlord PAN is reported and matched. A fake PAN, or a PAN belonging to someone else, is detected almost instantly through the department’s data-matching tools.
4. Claiming HRA and home loan interest for the same city without justification. It is possible to claim both — for example, if your owned house is let out and you rent a different one for work — but the facts must support it. A self-occupied house in the same city as your rental, with no clear reason, is a common red flag.
5. Applying the wrong metro list for the wrong year. From FY 2026-27, the 50% city list expands from 4 to 8 (adding Bengaluru, Hyderabad, Pune, Ahmedabad). For FY 2025-26 — the year most readers are filing now — only the original 4 cities qualify for 50%. Using the new list to compute exemption for an old year, or vice versa, produces a wrong number that the system flags on cross-check. Round-figure rent receipts with no bank trail also remain a high-risk profile, especially when paid to a relative — handwritten receipts without UPI or bank transfers are the textbook disallowed claim.

When you should not claim HRA

Skip the HRA claim if any of these apply: you are on the new tax regime for the year, you are not actually paying rent, your salary structure has no HRA component, or you cannot produce contemporaneous proof of rent paid. If you pay rent but receive no HRA from your employer, look at Section 80GG instead, which gives a smaller deduction to non-HRA earners who pay rent. Claiming HRA where the facts do not support it is not a grey area — it is a disallowance waiting to happen.

Documents and quick checklist

Keep these ready before claiming HRA:

• Rent agreement (registered or notarised, preferably)
• Monthly rent receipts with landlord signature and revenue stamp where applicable
• Bank statements showing rent transfers
• Landlord PAN (if annual rent exceeds ₹1,00,000) or signed no-PAN declaration
• Form 16 reflecting HRA computation by the employer
• Salary slips showing the HRA component and basic salary
• Form 26QC and TDS challan (if monthly rent exceeds ₹50,000)
• Calculation worksheet of the lowest-of-three exemption

Use the Rent receipt Generator below to generate rent receipts for any year:

Final takeaway

HRA is not a flat exemption. It is a calculated number capped by the lowest of three formula values, available only under the old tax regime, and defensible only with real proof. The salary slip number is just the starting point. Get the calculation right, keep the documentation tight, and pick the regime that actually saves you tax — not the one that looks bigger on paper. The reader who treats HRA as paperwork rather than entitlement is the one who never sees a notice.

HRA-related confusion or need help reviewing your salary structure, regime choice, and documentation? eTaxMate can help you compute the correct exemption, match it with your Form 16, and file your return without leaving exposure for later years.

---

This blog post is for general information only and does not constitute professional advice. Tax laws are subject to change and their application depends on individual facts and circumstances. Readers should consult a qualified professional before taking any action based on this content. eTaxMate accepts no liability for any action taken based on the information in this post.

Frequently Asked Questions