HRA Exemption: Rules, Calculation and Common Mistakes

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If you rent your home and your salary includes a House Rent Allowance, Section 10(13A) lets you exempt part of that HRA from tax. It is often one of the biggest reasons the old regime still beats the new one for city-based renters. But the exemption is not simply "the HRA on your payslip" — it is the lowest of a three-part test.

First, the big caveat: regime matters

The HRA exemption is available only under the old tax regime. Under the default new regime, your HRA is fully taxable. So before anything else, if you pay meaningful rent, run both regimes in the ITR calculator — the HRA exemption can tip the balance toward the old regime.

The three-part calculation

Your exempt HRA is the least of these three figures:

1. The actual HRA received from your employer;
2. Rent paid minus 10% of salary;
3. 50% of salary if you live in a metro (Delhi, Mumbai, Kolkata, Chennai), or 40% for any other city.

Here, "salary" means basic pay plus dearness allowance (and any commission on a fixed percentage of turnover), not your gross CTC. Whatever HRA is not exempt is added back to your taxable salary.

A worked example

Take someone in Mumbai with a basic salary of ₹6,00,000 a year, HRA of ₹3,00,000, paying rent of ₹2,40,000 a year. The three figures are:

• Actual HRA received: ₹3,00,000
• Rent − 10% of salary: ₹2,40,000 − ₹60,000 = ₹1,80,000
• 50% of salary (metro): ₹3,00,000

The exemption is the least of these: ₹1,80,000. So ₹1,20,000 of the HRA (₹3,00,000 − ₹1,80,000) remains taxable. Notice how the "rent minus 10% of salary" figure usually decides the outcome — if you pay little or no rent, this drops sharply and so does your exemption.

Proofs and the landlord PAN rule

To claim HRA smoothly you need:

• Rent receipts and ideally a rent agreement;
• Proof of payment — bank transfers are far safer than cash;
• Your landlord's PAN if annual rent exceeds ₹1,00,000. Missing the PAN is a common reason exemptions get disallowed. If the landlord has no PAN, a signed declaration is required.

Submit these to your employer during the proof-collection window so the exemption is reflected in your TDS; otherwise claim it when filing and take the refund.

HRA plus a home loan

You can legitimately claim both HRA and home-loan benefits in genuine situations — for example, you rent near your workplace while owning (and repaying a loan on) a house in another city, or your own house is let out. The claims must reflect reality; artificially "paying rent" to a family member in the same house you own invites scrutiny.

Common mistakes to avoid

• Claiming HRA under the new regime — it simply isn't allowed there.
• Using gross salary instead of basic + DA in the 10%/40%/50% steps, which overstates the exemption.
• Paying rent in cash with no receipts or agreement.
• Forgetting the landlord's PAN when rent crosses ₹1 lakh a year.
• Paying rent to a spouse for a jointly occupied home — a frequent audit flag.

Once you know your exempt HRA, feed the taxable balance into the regime comparison and the wider deductions guide to see your final position.