TaxSaral
Schedule IIIDeductionswas Section 10(13A) in IT Act 1961

HRA Exemption

House Rent Allowance received from employer is exempt up to the least of: (a) actual HRA received, (b) rent paid minus 10% of basic salary, or (c) 50%/40% of basic salary (metro/non-metro).

Who this applies to

Salaried employees who receive HRA as part of their pay structure and actually pay rent for accommodation. Only under the optional regime.

Key Points

  • All three limits must be computed — the LOWEST of the three is the exempt amount.
  • Metro cities: Delhi (NCR), Mumbai (MMR), Chennai, Kolkata — 50% of basic salary applies.
  • Non-metro cities (Bangalore, Hyderabad, Pune, etc.) — 40% of basic salary applies.
  • Rent must actually be paid; living in a parent's house and paying them rent is allowed only if properly documented.

Worked Examples

1

IT employee in Bangalore (non-metro)

Scenario

Arun earns ₹8L basic salary and receives ₹2.4L HRA from his employer in Bangalore. He pays ₹25,000/month rent (₹3L/year).

Calculation

Limit 1: Actual HRA received          = ₹2,40,000
Limit 2: Rent paid – 10% of basic     = ₹3,00,000 – ₹80,000 = ₹2,20,000
Limit 3: 40% of basic (non-metro)     = 40% × ₹8,00,000 = ₹3,20,000

Exempt HRA = Lowest of three = ₹2,20,000

Taxable HRA = ₹2,40,000 – ₹2,20,000 = ₹20,000

Result

₹2,20,000 of Arun's HRA is exempt from tax. Only ₹20,000 is taxable. To maximise exemption, he should document rent receipts and landlord PAN (required if annual rent exceeds ₹1L).

2

Employee in Delhi (metro) with high rent

Scenario

Preethi earns ₹12L basic salary and gets ₹4L HRA in Delhi. She pays ₹40,000/month rent (₹4.8L/year).

Calculation

Limit 1: Actual HRA received          = ₹4,00,000
Limit 2: Rent paid – 10% of basic     = ₹4,80,000 – ₹1,20,000 = ₹3,60,000
Limit 3: 50% of basic (metro)          = 50% × ₹12,00,000 = ₹6,00,000

Exempt HRA = Lowest = ₹3,60,000

Taxable HRA = ₹4,00,000 – ₹3,60,000 = ₹40,000

Result

₹3,60,000 is exempt; only ₹40,000 is taxable. Limit 2 (rent minus 10% of basic) is usually the binding constraint for most employees — paying higher rent directly improves this limit.

Related Sections

Section 134Rent Paid (No HRA received)
Section 15Salaries — Charging Section
Section 17Standard Deduction from Salary
Section 123Investments & Insurance Premium (₹1.5L limit)

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Section references are based on the Income Tax Act 2025 (Tax Year 2026-27). Examples are illustrative — verify with a Chartered Accountant before filing.