House Rent Allowance, commonly known as HRA, is one of the most widely claimed tax exemptions among salaried individuals in India. Almost every salaried person living in a rented home receives HRA as part of their salary package, but a surprisingly large number either claim the wrong amount or miss out on the exemption altogether because they are not sure how the calculation works. This article explains HRA in plain, simple terms: what it is, how the exemption is calculated, what conditions must be met, what documents you need, and the mistakes to avoid when claiming it while filing your income tax return for FY 2025-26, which corresponds to Assessment Year 2026-27.
What Is HRA and Why Does It Exist
House Rent Allowance is a component that many employers include in a salaried employee’s pay structure, specifically to help meet the cost of rented accommodation. The income tax law recognises that employees who live in rented homes bear a genuine expense that employees living in their own homes do not, and the HRA exemption exists to acknowledge this. Under Section 10(13A) of the Income Tax Act, 1961, read with Rule 2A of the Income Tax Rules, a portion of the HRA received from an employer can be excluded from taxable income, which means tax is not paid on that portion.
It is important to understand right from the start that HRA exemption is available only to those who opt for the old tax regime. Under the new tax regime, the entire HRA received from the employer becomes fully taxable, and the exemption does not apply at all. So before calculating how much HRA exemption you can claim, the first check is always whether you have chosen the old regime or the new regime for the year. If you have opted for the new regime, HRA simply adds to your taxable salary without any deduction.
Who Can Claim HRA Exemption
To claim HRA exemption, three basic conditions must be satisfied.
- First, you must be a salaried employee, not self-employed.
- Second, HRA must actually be a component of your salary structure, as received from your employer.
- Third, you must be living in rented accommodation and actually paying rent. If any of these three conditions is not met, the exemption under Section 10(13A) is not available.
If HRA is not a component of your salary, or if you are self-employed, you can claim rent deduction under Section 80GG of the Income Tax Act instead, subject to its own set of conditions and a separate limit. Section 80GG is also the provision available to salaried individuals whose employers simply do not include HRA in the pay structure, though this is less common among private sector employees today.
One scenario worth knowing about: it is legally permissible to claim HRA even when you are living in your parents’ home, provided the arrangement is genuinely one of tenant and landlord. Your parents must be the legal owners of the property, you must have a formal rent agreement with them, and rent payments must actually be made through bank transfers. The arrangement cannot be on paper alone, and the rental income received by the parents must be declared in their own income tax return, since any income the department sees flowing to them from you will be verified against their filings.
The Three-Condition Formula for HRA Exemption
The HRA exemption is not simply the full amount of HRA received from the employer. The amount exempt under Section 10(13A) is the lowest of the following three figures, calculated for the full year or for the period during which rent was actually paid.
The first figure is the actual HRA received from the employer during the year.
The second figure is the actual rent paid minus 10 percent of salary. Here, salary means basic salary plus dearness allowance, and also includes commission if it is paid as a fixed percentage of turnover. This figure essentially ensures that only the portion of rent that exceeds a threshold of 10 percent of basic salary qualifies for exemption, since the assumption is that a reasonable portion of rent can be expected from ordinary income.
The third figure is 50 percent of salary for employees living in a metro city, or 40 percent of salary for those living in a non-metro city. This cap prevents the exemption from being disproportionately large relative to the basic salary drawn.
The exemption is whichever of these three figures is the smallest. This is a critical point that many taxpayers miss: many employees focus only on the metro or non-metro percentage, but that is only one part of the formula, and the final exempt amount is always the lowest of the three.
Which Cities Count as Metro for HRA Purposes in FY 2025-26
This is an area where there is some genuine confusion this year, and it is worth being precise. For FY 2025-26, the income being declared in this year’s return was earned before 31st March 2026, and the Income Tax Act, 1961 continues to govern this return. For over two decades, only four cities qualified for the 50 percent HRA exemption under Section 10(13A): Delhi, Mumbai, Kolkata, and Chennai. Every other city, including Bengaluru, Hyderabad, Pune, and Ahmedabad, was classified as non-metro and limited to 40 percent of basic salary for the third condition.
From April 1, 2026, under the new Income Tax Rules, 2026, four additional cities have been added to the metro category: Bengaluru, Hyderabad, Pune, and Ahmedabad. However, this change applies only from FY 2026-27 onward. For FY 2025-26, Bengaluru, Hyderabad, Pune, and Ahmedabad remain non-metro for this filing, and the 40 percent of basic salary applies for the third condition for employees in these cities.
For salaried employees living in Gurgaon, this is straightforward. Gurgaon, also known as Gurugram, falls within non metro city, and entitled to use the 40 percent figure for the third condition when calculating their HRA exemption for FY 2025-26.
A Worked Example
A practical example makes the three-condition formula much clearer. Consider a salaried employee in Gurgaon with a basic salary of Rs 50,000 per month, HRA received from the employer of Rs 20,000 per month, and monthly rent paid of Rs 22,000 per month. On an annual basis, the three figures work out as follows.
Actual HRA received is Rs 2,40,000 for the year.
Actual rent paid minus 10 percent of basic salary is Rs 2,64,000 minus Rs 60,000, which equals Rs 2,04,000.
40 percent of basic salary, since Gurgaon falls in the non metro category, is Rs 2,40,000.
The lowest of these three figures is Rs 2,04,000, which is the amount exempt from tax. The remaining Rs 36,000 of HRA received that year, being the difference between the Rs 2,40,000 received and the Rs 2,04,000 exempt, becomes taxable as part of salary.
Documents You Need to Claim HRA Exemption
Having the right documents in place before you file is as important as knowing the formula. The documents required depend on the amount of rent paid during the year.
Rent receipts are the primary document, showing the amount paid each month, the address of the rented property, the name of the landlord, and the landlord’s signature. If you have paid rent through bank transfer, the transfer records serve as additional supporting evidence of actual payment.
A rent agreement between you and your landlord, signed and ideally registered, provides the formal basis for the rental arrangement and specifies the monthly rent and the period of tenancy.
If the total annual rent paid exceeds Rs 1,00,000, the landlord’s Permanent Account Number must be submitted to the employer at the time of submitting investment proofs, and it should also be available when filing the return. This is a mandatory requirement, and the exemption can be denied if the PAN is not furnished where the rent threshold is crossed. Where the landlord does not have a PAN, a declaration to that effect signed by the landlord can be submitted, though the PAN requirement should be verified carefully as rules around this can vary in practice.
If you are paying rent to parents, bank transfer records showing actual payments, a signed rent agreement, and your parents’ ownership documents for the property serve as the supporting set.
Keeping these records for the period of the year from 1st April 2025 to 31st March 2026 is important, since they help in accurate income reporting and reduce the chances of mismatches and delayed refunds if the department ever asks for supporting evidence.
Where to Claim HRA in the ITR
When filing the income tax return, HRA exemption is claimed under Schedule Salary, specifically under the section dealing with exemptions under Section 10. The ITR-1 and ITR-2 forms for AY 2026-27 now require a more detailed, component-wise disclosure of the HRA exemption being claimed, including the HRA received, the city of residence, the rent paid, and the computed exempt amount. This granular disclosure requirement is new for this assessment year and is designed to make the exemption claim more transparent and easier for the department to verify against employer TDS records. Filling each field carefully rather than entering only the final exempt figure is therefore important this year.
What Happens If Your HRA Is Not Fully Claimed Through Your Employer
Many salaried individuals submit their HRA proofs to their employer’s HR or payroll team at the start of the year, and the employer then accounts for the exemption while calculating monthly TDS. However, there are common situations where the full exemption is not captured by the employer. You may have changed jobs during the year. You may have started paying a higher rent mid-year and not updated the employer. You may have simply forgotten to submit your rent proofs in time. In any of these situations, the employer deducts TDS on a higher taxable salary than necessary.
The good news is that this can be corrected at the time of filing the return. The ITR allows you to claim the correct HRA exemption based on the actual rent paid and HRA received for the full year, regardless of what the employer computed. If the corrected exemption results in a lower tax liability than the TDS already deducted, the difference will come back to you as a refund after the return is processed.
If you changed employers during the year, remember to account for HRA and rent paid during both periods of employment, since the exemption applies for any period during the year when you were actually living in rented accommodation and receiving HRA from your employer, not just for the employment period with your current employer.
Common Mistakes to Avoid When Claiming HRA
A few recurring errors are worth calling out explicitly, since they are the most common reasons HRA-related notices or adjustment demands arise after filing.
Claiming HRA exemption under the new tax regime is not permitted. If you have opted for the new regime this year and you see HRA listed in your salary, the entire amount is taxable. Including an exemption for it in the return while under the new regime will lead to an adjustment.
Claiming the full HRA received without checking against the three-condition formula is another common error. The formula always gives the lowest of the three figures, and claiming the full HRA received without doing this check may result in an over-claimed exemption that gets corrected during processing.
Not disclosing the landlord’s PAN where annual rent exceeds Rs 1,00,000 is a specific compliance requirement, and the employer’s Form 16 Part B may already flag this if the PAN was not submitted to the employer. Ensuring the PAN is available and disclosed where the threshold is crossed is a simple step that prevents a specific and avoidable query later.
Failing to declare the rental income in the return of the person receiving rent, particularly when paying rent to parents or relatives, is an oversight that is increasingly visible to the department since bank transfers are tracked and AIS captures high-value receipts. If rent is being paid to a parent, the parent must include that rental income in their own tax return after claiming the standard deduction available on rental income under Section 24(a).
Section 80GG: For Those Who Do Not Receive HRA
For salaried individuals whose employers do not include HRA in their salary package, and for self-employed persons, Section 80GG provides an alternative route for claiming a deduction for rent paid. The conditions are stricter: you must not have received HRA at any point during the year, and you or your spouse must not own any residential property in the city where you currently reside and work. The deduction under Section 80GG is limited to the lowest of Rs 5,000 per month, 25 percent of adjusted total income for the year, or actual rent paid minus 10 percent of adjusted total income. Given the rental levels in cities like Gurgaon, the Rs 5,000 monthly cap is often the binding constraint, which means the maximum deduction available under this route is Rs 60,000 for the year, considerably lower than what a salaried employee paying high rent and receiving HRA can claim under Section 10(13A).
A Final Point on Regime Choice and HRA
For salaried employees who are on the fence between the old and new tax regimes this year, HRA is often the deciding factor. If the rent paid is high relative to the basic salary, the HRA exemption under the old regime can be substantial, and when combined with other deductions such as 80C investments and home loan interest, the old regime may still result in a lower net tax liability despite its higher base rates. The comparison is worth doing carefully with actual numbers rather than assuming one regime is always better, since the right answer genuinely differs from person to person depending on their salary structure and the amount of rent they pay.
Frequently Asked Questions
1. Can I claim HRA exemption if I am living in my own house? No. HRA exemption under Section 10(13A) is available only if you are actually living in rented accommodation and paying rent. If you own the house you live in, no HRA exemption can be claimed, and the full HRA received becomes taxable.
2. Can I claim HRA exemption if I have a home loan on a property in another city? Yes, this is permitted. If you own a property in one city but are living on rent in another city for work, you can claim both HRA exemption on the rent paid and the home loan interest deduction under Section 24(b) simultaneously, since the two relate to different properties in different locations.
3. What is the maximum HRA exemption I can claim? There is no fixed rupee ceiling. The exempt amount is the lowest of the three figures in the formula: actual HRA received, actual rent paid minus 10 percent of basic salary, and 50 or 40 percent of basic salary depending on the city. In the best case, where rent is high enough relative to HRA received, the entire HRA received can be exempt from tax.
4. Do I need to submit rent receipts to the income tax department when filing? Rent receipts are not submitted along with the return but must be retained as supporting documents. If the department raises a query or selects the return for scrutiny, these documents will need to be produced. It is good practice to keep them for at least four to six years after filing.
5. What happens if I forgot to submit HRA proofs to my employer and full TDS was deducted? You can still claim the correct HRA exemption directly in your ITR, based on actual rent paid and actual HRA received. If the corrected tax liability is lower than the TDS already deducted by your employer, the difference will be refunded to you after the return is processed.
6. Can a salaried person in Gurgaon claim both HRA exemption and a home loan deduction? Yes, provided the home loan is on a property located in a different city where you are not currently residing. If both the rented home and the owned home are in the same city, the department may question why rented accommodation was necessary despite owning property in the same location, and the HRA claim may be disallowed.
7. Is there a minimum rent threshold for the HRA exemption to apply? The second condition in the formula, which is rent paid minus 10 percent of basic salary, must be a positive number for any exemption to result. This means your annual rent must exceed 10 percent of your annual basic salary for the exemption to kick in at all. Below that threshold, the second condition gives zero or a negative figure, which makes the overall exempt amount zero regardless of the HRA received.
