What is House Rent Allowance (HRA)? Meaning, Definition & How It Works
House rent allowance in India traces back to Section 10(13A) of the old Income Tax Act, 1961, and now sits under the Income-tax Act, 2025, which took effect on 1 April 2026. Employers have used it for decades as a way to structure pay so that part of an employee’s cost to company reaches them with a lower tax bill.
HRA applies to salaried employees across private companies, government departments and public sector units. It does not apply to self-employed professionals, who instead rely on a separate deduction under Section 80GG for rent paid. Because HRA is defined and monitored by the Central Board of Direct Taxes (CBDT), the eligibility conditions and the metro city list are fixed by rule rather than by each employer.
HRA exemption remains one of the largest salary-structuring benefits still available under the old tax regime. It matters most to renters in expensive rental markets, where the gap between rent paid and take-home pay is largest.
Did You Know?
From FY 2026-27, Bengaluru, Hyderabad, Pune and Ahmedabad now qualify for the higher 50% HRA exemption rate, joining Delhi, Mumbai, Kolkata and Chennai under Rule 279 of the Income-tax Rules, 2026. Before this change, only those four original metros got the 50% rate; every other city, including these four, was capped at 40%.
How Does House Rent Allowance Work?
HRA works in two stages: first your employer decides how much HRA to pay you as part of your salary structure, then the tax department decides how much of that HRA you actually get to keep tax-free.
- Employer sets the HRA component. Most companies fix HRA at roughly 40% to 50% of basic salary as part of the overall cost-to-company structure, though the exact figure varies by employer.
- You pay rent and collect proof. To claim any exemption you must actually live in rented accommodation and be able to show rent receipts, and the landlord’s PAN if annual rent exceeds ₹1,00,000.
- You choose the old tax regime. HRA exemption under Section 10(13A) is available only if you opt for the old regime, since the new regime has been the default filing option since FY 2023-24.
- The exemption is worked out as the lowest of three amounts. This “least of three” rule, covered in the Formula section below, decides how much of your HRA actually escapes tax.
- The remaining HRA is added to taxable salary. Whatever is left after the exemption is taxed at your normal income-tax slab rate, just like any other part of your pay.
Pro Tip
Run the least-of-three calculation before assuming a metro city automatically means a bigger exemption. In many cases the rent-paid condition, not the city percentage, is what actually caps your exemption, so a small rent relative to salary can leave the city upgrade doing nothing for you.
HRA Exemption Formula
The tax-exempt part of HRA under Section 10(13A) is the lowest of the following three amounts.
HRA Exemption = Least of the following three amounts: 1. Actual HRA received from the employer 2. Rent paid minus 10% of salary 3. 50% of salary (metro city) or 40% of salary (non-metro city) Where: Salary = Basic pay + Dearness Allowance (DA, if it counts towards retirement benefits) + commission as a fixed percentage of turnover, if any. Rent paid = the actual rent you pay for the financial year, supported by receipts. Metro city (50% rate, FY 2026-27 onwards) = Delhi, Mumbai, Kolkata, Chennai, Bengaluru, Hyderabad, Pune or Ahmedabad. Every other city uses the 40% rate. |
Example with Real Numbers
Priya, a 29-year-old software engineer, works in Bengaluru, one of the four cities newly added to the 50% metro list from FY 2026-27. She has chosen the old tax regime.
| Item | Annual amount |
| Basic salary | ₹6,00,000 |
| HRA received | ₹3,00,000 |
| Rent paid | ₹3,36,000 |
Applying the least-of-three formula for FY 2026-27:
- Actual HRA received: ₹3,00,000
- Rent paid minus 10% of salary: ₹3,36,000 − ₹60,000 = ₹2,76,000
- 50% of salary (Bengaluru is now a metro city): 50% × ₹6,00,000 = ₹3,00,000
The lowest of these three figures is ₹2,76,000, so that is Priya’s exempt HRA. The remaining ₹24,000 of her HRA gets added to taxable salary.
Before the FY 2026-27 city reclassification, Bengaluru sat in the 40% bracket. Recomputing the third condition at 40% gives ₹2,40,000, which would have been the lowest figure and therefore her exemption.
The city upgrade alone has raised Priya’s tax-free HRA by ₹36,000 for the year, without her rent or salary changing at all.
Key Components of House Rent Allowance
- Salary (Basic + DA): the base figure the whole HRA calculation runs on. Only dearness allowance that counts towards retirement benefits is included; most private-sector employees have no DA, so salary here usually just means basic pay.
- HRA received: the fixed HRA amount your employer pays, visible on your payslip and Form 16. This is the ceiling; the exemption can never exceed this figure.
- Actual rent paid: what you genuinely pay your landlord over the financial year. This must be backed by rent receipts, and by a rent agreement where one exists.
- City classification: whether you live in one of the eight metro cities (50% rate) or elsewhere (40% rate), as fixed under Rule 279 of the Income-tax Rules, 2026.
- Documentation and Form 124: from FY 2026-27, the exemption declaration you give your employer moves to Form 124, which also asks you to disclose your relationship with your landlord if rent is paid to a family member.
Benefits of House Rent Allowance
- Lowers taxable income with no fresh investment: unlike Section 80C, HRA exemption needs no lock-in or new purchase. If you already pay rent, the exemption simply follows from proof you likely already have.
- Bigger relief for metro renters from FY 2026-27: employees in Bengaluru, Hyderabad, Pune and Ahmedabad now get the same 50% ceiling as Delhi, Mumbai, Kolkata and Chennai, which helps anyone paying high rent relative to salary in India’s tech and business hubs.
- Can be combined with a home loan deduction: someone who owns a home in one city but rents in another for work can often claim HRA on the rented home and, separately, interest deduction on the home loan for the owned property; see how the interest portion is worked out in an EMI amortisation schedule.
- Available for rent paid to parents: if you genuinely pay rent to a parent who owns the home you live in, HRA can be claimed, provided the arrangement is documented and the rent is actually transferred, ideally through a bank account.
Risks & Limitations
- Old tax regime only: HRA exemption is unavailable if you stay in the default new tax regime. Claiming it requires actively opting for the old regime, generally by filing Form 10-IEA where applicable; see how HRA fits among other exempt income categories.
- Proof requirements have tightened: from FY 2026-27, Form 124 requires you to disclose your relationship with your landlord. Rent paid to a relative without a genuine agreement and traceable bank transfer is now more likely to be questioned.
- City classification has gaps: Gurugram and Noida sit right next to Delhi but are not on the eight-city metro list, so employees there remain capped at the 40% rate despite comparable rents.
- A metro upgrade does not automatically raise your exemption: as Priya’s example shows, the benefit only shows up when the city percentage is the lowest of the three conditions. If your rent is modest relative to salary, the rent-paid condition may still cap you.
- Documentation gaps get expensive: missing rent receipts or a missing landlord PAN, where annual rent exceeds ₹1,00,000, is one of the most common reasons an HRA claim gets disallowed at the employer verification stage or later, during the assessment year scrutiny of your return.
Important
HRA received while living in your own home, with no rent actually paid, is fully taxable. Being paid HRA as part of your salary structure does not by itself create an exemption.
Frequently Asked Questions
What is House Rent Allowance (HRA) in simple terms?
HRA is money your employer pays you, as part of your salary, to help with the cost of renting a home. Part of it can be tax-free if you actually pay rent, keep proof, and file under the old tax regime.
How is HRA exemption calculated?
The exempt amount is the lowest of three figures: the actual HRA you receive, your rent paid minus 10% of your salary, and 50% or 40% of your salary depending on whether your city is classified as a metro. The formula section above walks through each one.
Which cities count as metro cities for HRA in FY 2026-27?
Eight cities now qualify for the higher 50% rate: Delhi, Mumbai, Kolkata, Chennai, Bengaluru, Hyderabad, Pune and Ahmedabad. Bengaluru, Hyderabad, Pune and Ahmedabad were added from FY 2026-27; for FY 2025-26 returns, only the original four cities got 50%, and these four were still at 40%.
Can I claim HRA if I pay rent to my parents?
Yes, provided the arrangement is genuine: you actually transfer rent, ideally through a bank account, and your parent declares that rent as their own income. Keep a rent agreement and receipts, since from FY 2026-27 Form 124 also asks you to disclose the landlord relationship.
Is HRA available under the new tax regime?
No. HRA exemption under Section 10(13A) is available only under the old tax regime. If you stay in the new regime, which is the default option, your full HRA is added to taxable salary regardless of rent paid or city.
Can I claim both HRA and a home loan interest deduction together?
Yes, in the right situation, most commonly when you own a home in one city, perhaps still under construction or occupied by family, while renting a home in the city where you actually work. Each claim has to satisfy its own conditions independently.
What documents do I need to claim HRA exemption?
You generally need rent receipts for the year, a rent agreement where available, and your landlord’s PAN if annual rent crosses ₹1,00,000. From FY 2026-27, you also declare these details on Form 124, along with your relationship to the landlord if relevant.
Should I structure my salary for a higher HRA component?
It can help if you live in a high-rent city and expect to stay in the old tax regime, but the benefit depends entirely on your actual rent relative to your salary, not just the HRA figure on paper. A salary structuring review can show whether a higher HRA component would genuinely lower your tax, based on your city and rent.