House Rent Allowance (HRA) is one of the most significant tax-saving components for salaried employees in India. If you live in a rented accommodation, understanding HRA exemption can save you ₹50,000 to ₹2,00,000+ in annual taxes. This guide explains exactly how it works.
What Is HRA Exemption?
HRA is a component of your salary paid by your employer to cover housing costs. Under Section 10(13A) of the Income Tax Act, a portion of this HRA is exempt from tax — but only if you actually pay rent. If you live in your own house or don't pay rent, the entire HRA is taxable.
The HRA Exemption Formula
The exempt HRA is the minimum of these three amounts:
- Actual HRA received from your employer
- 50% of basic salary if you live in a metro city (Delhi, Mumbai, Kolkata, Chennai) OR 40% of basic salary for non-metro cities
- Rent paid minus 10% of basic salary
The lowest of these three is your exempt HRA. The remainder is taxable.
Example 1: Metro City (Mumbai)
Basic salary: ₹50,000/month | HRA received: ₹25,000/month | Rent paid: ₹20,000/month
- (a) Actual HRA received = ₹25,000
- (b) 50% of basic (metro) = ₹25,000
- (c) Rent − 10% of basic = ₹20,000 − ₹5,000 = ₹15,000
Exempt HRA = ₹15,000/month (minimum of the three) = ₹1,80,000/year
Taxable HRA = ₹25,000 − ₹15,000 = ₹10,000/month
Example 2: Non-Metro City (Ahmedabad)
Basic salary: ₹40,000/month | HRA received: ₹16,000/month | Rent paid: ₹12,000/month
- (a) Actual HRA received = ₹16,000
- (b) 40% of basic (non-metro) = ₹16,000
- (c) Rent − 10% of basic = ₹12,000 − ₹4,000 = ₹8,000
Exempt HRA = ₹8,000/month = ₹96,000/year
Common HRA Mistakes to Avoid
- Not keeping rent receipts: For rent above ₹8,333/month (₹1 lakh/year), you must submit rent receipts to your employer. For rent above ₹1 lakh/month, the landlord's PAN is mandatory.
- Claiming HRA under new regime: HRA exemption is not available under the new tax regime. You must choose the old regime to claim it.
- Paying rent to spouse: You cannot claim HRA for rent paid to your spouse. However, paying rent to parents is allowed (they must declare it as income).
- Not claiming when no HRA in salary: Even if your salary doesn't include HRA, you can claim deduction under Section 80GG (up to ₹5,000/month) if you meet certain conditions.
Use our HRA Calculator to calculate your exact HRA exemption, and our Income Tax Calculator to see the overall tax impact.