House Rent Allowance can save salaried employees a substantial amount of tax — but almost everyone misunderstands how much of it is actually exempt. The exempt amount is not simply the HRA your employer pays you; it is the lowest of three separate figures defined by Section 10(13A) of the Income Tax Act. Getting this right, and keeping the correct paperwork, is the difference between a smooth claim and a rejected one. This guide explains the rule, works through an example, and covers the practical requirements most people trip over.
The three figures that decide your exemption
Your exempt HRA is the smallest of these three amounts:
- The actual HRA received from your employer during the year.
- 50% of your basic salary if you live in a metro city (Delhi, Mumbai, Kolkata or Chennai), or 40% if you live anywhere else.
- Rent paid minus 10% of basic salary.
Whichever of these three is lowest is your tax-free HRA; the rest of the HRA you received is added to your taxable income. Note that "basic salary" here means basic pay plus dearness allowance, if any — not your gross or CTC.
A worked example
Suppose your basic salary is ₹50,000 a month, your employer pays HRA of ₹20,000 a month, you pay rent of ₹18,000 a month, and you live in Mumbai. Working annually, the three figures are:
- Actual HRA received = ₹20,000 × 12 = ₹2,40,000
- 50% of basic (metro) = ₹25,000 × 12 = ₹3,00,000
- Rent paid − 10% of basic = (₹18,000 − ₹5,000) × 12 = ₹1,56,000
The lowest is ₹1,56,000, so that is your exempt HRA. The remaining ₹84,000 of the HRA you received is taxable. The HRA Exemption Calculator works all three out instantly — just enter your basic, HRA, rent and city.
The metro rule catches everyone out
Only four cities count as "metro" for the higher 50% rate: Delhi, Mumbai, Kolkata and Chennai. Every other city — including Bengaluru, Hyderabad, Pune, Ahmedabad and Gurgaon — is treated as non-metro at 40%, despite being large and expensive. This surprises a lot of people and is a common reason a self-calculated exemption comes out wrong. Always check which rate applies to your actual city.
You must keep rent receipts
To claim HRA, you need to submit rent receipts to your employer (for the TDS calculation) and keep them in case of assessment. A valid receipt shows the tenant and landlord names, the property address, the rent amount and the period. Where a single cash rent payment exceeds ₹5,000, a ₹1 revenue stamp is required on the receipt; payments made by bank transfer do not need a stamp because the bank record itself is proof. Generating a full set of monthly receipts by hand is tedious — the Rent Receipt Generator produces them all as a single PDF for your chosen period.
The landlord PAN requirement
If your total annual rent exceeds ₹1,00,000, you must report your landlord's PAN to your employer. Without it, the HRA exemption can be denied on the portion above the threshold. If your landlord does not have a PAN, you need a signed declaration from them along with their details. This is a frequent stumbling block, so sort it out at the start of the year rather than in the March rush.
Can you pay rent to your parents?
Yes — paying rent to a parent and claiming HRA is legal, and can be a legitimate way to save tax within a family. But the arrangement must be genuine, not a paper fiction. The parent must actually own the property, you should transfer the rent by bank transfer (not cash), and — importantly — your parent must declare that rent as income in their own tax return. If their income is low, the family may still come out ahead, but skipping the declaration turns a legal arrangement into tax evasion.
What if your employer does not pay HRA?
Not everyone receives HRA — the self-employed and many small-firm employees do not have it as a salary component. If you pay rent but get no HRA, you are not left out: you can claim a deduction under Section 80GG instead. This deduction is the lowest of ₹5,000 per month, 25% of your total income, or rent paid minus 10% of total income. It is more limited than a full HRA exemption and comes with conditions — you (or your spouse or minor child) must not own a home in the city where you live, and you must file Form 10BA declaring the rent. Like HRA, Section 80GG is only available under the old tax regime. It is a useful fallback, but if your employer can restructure your salary to include an HRA component, that usually produces a larger tax saving.
Keep the documentation clean
Whatever route you use, the paperwork is what protects the claim if the tax department ever asks. Keep every rent receipt, hold on to the rental agreement, and prefer paying rent by bank transfer so there is an electronic trail that ties each payment to your landlord. Where you must pay cash, insist on stamped receipts. If your landlord is a family member, keep proof that the rent actually moved and that they declared it. A claim backed by a consistent paper trail — agreement, monthly transfers and receipts — is almost never a problem; a claim resting on nothing but round-figure cash receipts written out in March is exactly the kind that draws scrutiny.
The old-vs-new regime catch
This is the most important point for 2026: the HRA exemption is available only under the old tax regime. The new regime offers lower slab rates but disallows HRA, the Section 80C deduction and most other exemptions. If you pay significant rent and can claim a large HRA (plus 80C investments), the old regime is often cheaper overall; if you claim little, the new regime usually wins. Do not assume — compare both. See what actually reaches your bank account under each with the In-Hand Salary Calculator, and estimate your total liability with the Income Tax Calculator before you choose.
Key takeaways
- Exempt HRA = the lowest of actual HRA, 50%/40% of basic, and rent minus 10% of basic.
- Only Delhi, Mumbai, Kolkata and Chennai qualify for the 50% metro rate.
- Keep rent receipts (₹1 stamp on cash above ₹5,000) and report the landlord's PAN if annual rent tops ₹1 lakh.
- HRA is available only under the old regime — compare both regimes before choosing.