Key Takeaways
- HRA exemption under Section 10(13A) read with Rule 2A is the least of three amounts: actual HRA received, rent paid minus 10% of salary, and 50% (metro) or 40% (non-metro) of salary.
- Salary for this calculation means basic pay plus dearness allowance that forms part of retirement benefits, plus any fixed-percentage commission on turnover. HRA itself and other allowances are excluded.
- Only four metro cities qualify for the 50% limit: Mumbai, Delhi, Kolkata and Chennai. Bengaluru, Hyderabad, Pune and all others use the 40% limit.
- HRA exemption is available only under the old regime. Under the new regime (default from AY 2024-25) HRA under Section 10(13A) is fully taxable. This is the single biggest decision point for AY 2026-27.
- Landlord PAN is mandatory in Form 12BB when annual rent crosses Rs 1,00,000; below that, rent receipts are enough.
- Employees receiving no HRA can fall back on Section 80GG (Form 10BA), capped at Rs 5,000 per month among three limits.
- If your Form 16 underclaims HRA, claim the correct amount in your ITR and recover the excess TDS as a refund.
How much HRA is tax-exempt under Section 10(13A)? The exempt portion is the lowest of three figures: the actual HRA your employer pays, the rent you pay minus 10% of your basic-plus-DA salary, and 50% of that salary if you live in Mumbai, Delhi, Kolkata or Chennai (40% elsewhere). The rest of your HRA is taxable, and the exemption applies only if you file under the old tax regime.
House Rent Allowance is one of the most valuable salary components for a tenant, yet it is also one of the most misclaimed. Employees routinely assume the entire HRA on their payslip is tax-free, or they claim it while sitting in the new regime where it does not exist. Both mistakes surface either as excess TDS locked up until refund, or as a notice when the department cross-checks rent claims against landlord PANs.
This guide is the step-by-step calculation companion to our broader HRA exemption overview under Section 10(13A). Here the focus is the arithmetic: how the three-way minimum actually works with real numbers, how to decide between the old and new regime for AY 2026-27, the Form 12BB paperwork your employer needs, and the Section 80GG route for those who receive no HRA at all.
Looking for expert help with HRA exemption calculation and ITR filing help? The team at Tax Garden, based in Kondapur, Hyderabad, helps Indian SMEs stay compliant end-to-end: filings, notices, and advisory, all in one place.
The Section 10(13A) exemption: three amounts, take the least
Section 10(13A) of the Income Tax Act, 1961 exempts HRA from tax, but only to the extent prescribed by Rule 2A of the Income Tax Rules, 1962. Rule 2A fixes the exemption at the least of the following three amounts:
| # | Amount | How it is measured |
|---|---|---|
| 1 | Actual HRA received | The HRA line item your employer actually paid during the period |
| 2 | Rent paid minus 10% of salary | Annual rent you paid, reduced by 10% of salary for the same period |
| 3 | 50% or 40% of salary | 50% of salary for metro residents, 40% for everyone else |
The logic behind the formula is deliberate. Limit 2 ensures you get relief only for rent that genuinely exceeds a baseline (10% of pay, treated as the portion you would spend on housing anyway). Limit 3 caps the concession so that a very high rent in a modest-salary job cannot generate an unlimited exemption. Limit 1 simply stops you from exempting more than you were actually paid. The smallest of the three is what the law is willing to leave untaxed.
What counts as "salary" here
This is where most manual calculations go wrong. For HRA purposes, salary means basic pay plus dearness allowance (DA) that forms part of retirement benefits, plus commission fixed as a percentage of turnover achieved by the employee. It does not include HRA itself, bonus, overtime, other allowances, or perquisites. Where DA is not linked to retirement benefits, it is excluded. Use the salary for the exact months the rented accommodation was occupied, not a flat annual figure, if pay or rent changed mid-year.
Rule 2A conditions you must satisfy
The exemption is not automatic. Rule 2A and settled practice require all of the following:
- You are a salaried employee who actually receives HRA as part of the salary structure. HRA cannot be created retrospectively.
- You pay rent for residential accommodation that you occupy, and you do not own the accommodation you live in.
- The exemption runs only for the period during which you paid rent and occupied rented accommodation. Months in an owned or rent-free house get no HRA exemption.
- You hold rent receipts and, where required, the rent agreement and landlord PAN. Payment through banking channels strengthens the claim.
A common trap: paying rent to a parent or spouse. This is permissible and upheld where the arrangement is genuine, the property is actually owned by that relative, the rent is paid (ideally by bank transfer), and the recipient declares the rent as income in their own return. A paper arrangement with no real payment is disallowed.
Metro versus non-metro: only four cities
For the 50% limit, "metro" has a narrow statutory meaning. Only Mumbai, Delhi, Kolkata and Chennai qualify. Every other city uses 40%.
| Classification | Cities | Salary limit (Amount 3) |
|---|---|---|
| Metro | Mumbai, Delhi, Kolkata, Chennai | 50% of salary |
| Non-metro | Bengaluru, Hyderabad, Pune, Gurugram, Noida, Ahmedabad, Jaipur, and all others | 40% of salary |
There is no discretion here. Hyderabad and Bengaluru are large metropolitan cities in every ordinary sense, but for HRA they attract the 40% limit. Use the city where you actually reside and pay rent, not where your employer is headquartered.
Worked Example 1: Metro employee (Mumbai)
Consider Priya, who rents a flat in Mumbai for the full financial year 2025-26 (AY 2026-27).
- Basic pay: Rs 50,000 per month
- DA forming part of retirement benefits: Rs 5,000 per month
- HRA received: Rs 25,000 per month
- Rent paid: Rs 22,000 per month
Step 1: Annualise the figures. Salary (basic + DA) = Rs 55,000 x 12 = Rs 6,60,000 HRA received = Rs 25,000 x 12 = Rs 3,00,000 Rent paid = Rs 22,000 x 12 = Rs 2,64,000
Step 2: Compute the three amounts.
| Amount | Computation | Value |
|---|---|---|
| 1. Actual HRA received | Rs 3,00,000 | Rs 3,00,000 |
| 2. Rent minus 10% of salary | Rs 2,64,000 - Rs 66,000 | Rs 1,98,000 |
| 3. 50% of salary (metro) | 50% of Rs 6,60,000 | Rs 3,30,000 |
Step 3: Take the least. The lowest figure is Rs 1,98,000, so that much HRA is exempt.
Step 4: Taxable HRA = Rs 3,00,000 received minus Rs 1,98,000 exempt = Rs 1,02,000, added to Priya's taxable salary.
Worked Example 2: Non-metro employee (Pune)
Now take Arjun, who rents in Pune (non-metro) for the full year.
- Basic pay: Rs 40,000 per month
- DA forming part of retirement benefits: Nil
- HRA received: Rs 16,000 per month
- Rent paid: Rs 15,000 per month
Step 1: Annualise. Salary (basic + DA) = Rs 40,000 x 12 = Rs 4,80,000 HRA received = Rs 16,000 x 12 = Rs 1,92,000 Rent paid = Rs 15,000 x 12 = Rs 1,80,000
Step 2: Compute the three amounts.
| Amount | Computation | Value |
|---|---|---|
| 1. Actual HRA received | Rs 1,92,000 | Rs 1,92,000 |
| 2. Rent minus 10% of salary | Rs 1,80,000 - Rs 48,000 | Rs 1,32,000 |
| 3. 40% of salary (non-metro) | 40% of Rs 4,80,000 | Rs 1,92,000 |
Step 3: Take the least. The lowest is Rs 1,32,000, which is exempt.
Step 4: Taxable HRA = Rs 1,92,000 minus Rs 1,32,000 = Rs 60,000 added to taxable salary.
Notice how the binding constraint differs. For Priya (metro) the exemption was capped by rent minus 10% of salary; for Arjun the 40% limit and the rent-minus-10% limit came close, and the rent limit won by a hair. This is why you must run all three every year rather than assume the metro percentage always governs.
Old regime versus new regime: the decision that comes first
For AY 2026-27 this is the point that overrides everything above. HRA exemption under Section 10(13A) is available only if you file under the old tax regime. The new regime under Section 115BAC has been the default from AY 2024-25 onwards, and it does not allow the HRA exemption. If you stay in the new regime, your entire HRA is taxable regardless of how much rent you pay.
| Feature | Old regime | New regime (default) |
|---|---|---|
| HRA exemption u/s 10(13A) | Available | Not available |
| Section 80C, 80D, 80GG, home loan interest on let-out | Available | Mostly not available |
| Standard deduction on salary | Rs 50,000 | Rs 75,000 |
| Slab rates | Higher | Lower, wider slabs |
| How to opt | Salaried: choose old regime each year; declare to employer and confirm in ITR | Applies automatically unless you opt out |
The practical test: add up your HRA exemption plus other old-regime deductions (Section 80C, 80D, home loan interest, and so on), and compare the tax under the old regime against the tax under the new regime with its lower slabs and larger standard deduction. A high rent in a metro often tilts the balance toward the old regime; a modest rent may not. Salaried taxpayers can switch between regimes each year, so re-run this comparison annually. If home loan interest is also in play, our guide to home loan tax benefits under Sections 24 and 80C shows how those deductions stack under the old regime alongside HRA.
Form 12BB, rent receipts and the landlord PAN rule
To let your employer grant the HRA exemption in Form 16 (and deduct lower TDS through the year), you declare your rent in Form 12BB, the statement of claims usually collected in the last quarter of the financial year.
| Requirement | Threshold | What to provide |
|---|---|---|
| Rent receipts | Always | Receipts showing rent, period, landlord name |
| Rent agreement | Recommended | Especially for higher rents or family arrangements |
| Landlord PAN | Annual rent above Rs 1,00,000 | Landlord's PAN in Form 12BB |
| Landlord declaration | If landlord has no PAN | Signed declaration with name and address |
The Rs 1,00,000 threshold works out to roughly Rs 8,333 a month. Cross it and the landlord's PAN becomes mandatory; the department uses it to match the rent you claim against the rent income the landlord reports. Overstating rent to a PAN-holding landlord who declares nothing is the fastest way to draw scrutiny.
HRA declaration checklist
- Confirm you are on the old regime for the year; otherwise HRA is wasted effort.
- Collect rent receipts for every month of tenancy.
- If annual rent exceeds Rs 1,00,000, obtain the landlord PAN.
- Fill the HRA section of Form 12BB with rent, landlord name, address and PAN.
- Submit to the employer before the payroll cut-off so TDS is adjusted.
- Retain proofs for at least six years in case of assessment.
Section 80GG: the fallback when you receive no HRA
If your salary structure includes no HRA at all, or you are self-employed and pay rent, Section 10(13A) is unavailable, but Section 80GG provides a smaller deduction. It is claimed by filing Form 10BA and is available only under the old regime.
The deduction is the least of three:
- Rs 5,000 per month (Rs 60,000 per year)
- 25% of total income (before this deduction)
- Rent paid minus 10% of total income
You are disqualified from Section 80GG if you, your spouse, or your minor child own residential accommodation at the place where you work or run your business, or if you claim a self-occupied property benefit on a house you own elsewhere.
Worked Example 3 (Section 80GG): Neha is a freelancer with total income of Rs 8,00,000 and pays rent of Rs 15,000 per month (Rs 1,80,000 a year), receiving no HRA.
| Limit | Computation | Value |
|---|---|---|
| Rs 5,000 per month | Rs 5,000 x 12 | Rs 60,000 |
| 25% of total income | 25% of Rs 8,00,000 | Rs 2,00,000 |
| Rent minus 10% of income | Rs 1,80,000 - Rs 80,000 | Rs 1,00,000 |
The least is Rs 60,000, so Neha deducts Rs 60,000 under Section 80GG. The Rs 5,000-a-month cap is almost always the binding limit, which is why 80GG is far less generous than a full HRA exemption. For the finer eligibility conditions, see our dedicated note on rent deduction without HRA linked from the overview guide.
TDS, Form 16 and recovering an underclaimed HRA
Your employer computes the HRA exemption based on the proofs you submit and reflects it in Form 16, deducting TDS on the taxable balance. Problems arise when the employer gets it wrong or you miss the submission window:
- Employer underclaims HRA (for example, applies 40% to a genuine metro tenancy, or ignores DA in salary): the taxable HRA in Form 16 is overstated and excess TDS is deducted.
- You missed the Form 12BB deadline: the employer may treat the whole HRA as taxable and deduct TDS on all of it.
Neither situation is final. The Form 16 figure is not binding on you. When you file your return, recompute the correct exemption and claim it directly in the ITR. Your taxable salary drops, your tax liability falls, and the excess TDS the employer deducted is refunded after the return is processed. Keep your rent receipts and landlord PAN ready, because a large HRA claim not backed by Form 16 is more likely to be picked for verification. Choosing the correct ITR form and reporting the exemption cleanly matters here; our ITR filing guide for AY 2026-27 walks through the forms and deadlines.
The reverse also happens: employees over-claim by inflating rent or claiming for months in an owned home. When the department matches your rent against the landlord's PAN and reported income, an unsupported claim is added back with interest under Section 234B and 234C and, in clear cases, a penalty for under-reporting. Claim what you genuinely paid, keep the paper trail, and the exemption is entirely safe.
Sources: Section 10(13A) and Section 80GG of the Income Tax Act, 1961; Rule 2A and Rule 26C (Form 12BB) of the Income Tax Rules, 1962; Section 115BAC (new tax regime); Form 10BA and Form 16 as prescribed by the CBDT; Income Tax Department e-filing portal (incometax.gov.in). Figures in examples are illustrative and current for AY 2026-27.
