HRA Calculation: Formula, Example and Tax Exemption Rules

Introduction

An eligible salaried employee must apply the prescribed HRA calculation formula to determine the amount that can be claimed as exempt. The balance, if any, is included in the taxable salary. House Rent Allowance, commonly known as HRA, is a salary component provided by an employer to help an employee meet the cost of rented accommodation. However, the entire HRA received is not automatically exempt from income tax.

 

From April 1, 2026, HRA exemption is governed by Section 11 read with Schedule III of the Income-tax Act, 2025 and Rule 279 of the Income-tax Rules, 2026. Under the earlier law, it was governed by Section 10(13A) of the Income-tax Act, 1961 read with Rule 2A.

 

This article explains the HRA calculation formula, eligible salary components, revised metro city rules, calculation examples, documentation requirements, and important conditions for claiming the exemption.

 

 

How Is HRA Calculated?

The exempt portion of HRA is the lowest of the following three amounts:

• Actual HRA received from the employer
• Actual rent paid minus 10% of eligible salary
• 50% of eligible salary for specified cities or 40% of eligible salary for other cities

The amount remaining after deducting the eligible exemption from the actual HRA received is taxable as salary income.

 

 

What Is House Rent Allowance?

House Rent Allowance is an allowance paid by an employer as part of an employee’s salary. Its purpose is to help the employee meet the cost of living in rented residential accommodation.

 

HRA received from an employer forms part of salary income. However, an eligible portion may be exempt if the employee:

• Receives HRA as part of the salary;
• Actually pays rent for residential accommodation;
• Occupies the rented accommodation; and
• Selects the tax regime under which HRA exemption is permitted.

The exemption is not equal to the entire rent paid or the entire HRA received. It must be determined using the prescribed HRA calculation formula.

 

 

Legal Provisions Governing HRA Calculation

The law applicable to HRA depends on the relevant financial or FY.

 

Period	Governing provision
FY 2025-26 and earlier	Section 10(13A) of the Income-tax Act, 1961 read with Rule 2A
FY 2026-27 onwards	Section 11 read with Schedule III of the Income-tax Act, 2025 and Rule 279 of the Income-tax Rules, 2026

 

Note: The Income-tax Act, 2025 came into force on April 1, 2026. It replaced the Income-tax Act, 1961 for FY 2026-27 onwards. The basic principle of granting an exemption for eligible HRA continues under the new law.

 

Employees may also review the major changes impacting salaried taxpayers in 2026 to understand how the new income-tax law affects salary reporting, exemptions, and return filing.

 

 

Who Can Claim HRA Tax Exemption?

An employee may claim HRA exemption when all the following conditions are satisfied:

• The person has salary income.
• HRA is separately received as part of the salary.
• The employee actually pays rent.
• The accommodation is occupied by the employee.
• The rent payment is genuine and supported by evidence.
• The employee opts for the old tax regime or the corresponding regime that permits HRA exemption.

A person living in a self-owned house without paying rent cannot claim HRA exemption. In such a case, the HRA received from the employer is generally taxable.

 

Self-employed individuals and salaried individuals who do not receive HRA cannot claim the HRA exemption. They may examine their eligibility for a separate rent-related deduction under the applicable income-tax provisions.

 

 

HRA Calculation Formula

For HRA exemption purposes, calculate the following three amounts:

1. Actual HRA Received: This is the total House Rent Allowance paid by the employer during the relevant period.

 

2. Rent Paid Minus 10% of Salary: The second amount is calculated as: Actual rent paid − 10% of eligible salary

When the rent paid is not more than 10% of eligible salary, the exemption under this part of the calculation will be nil.

 

3. Percentage of Salary Based on the City: The third amount is:

• 50% of eligible salary when the rented house is situated in a specified city; or
• 40% of eligible salary when the rented house is situated in any other city.

The lowest of these three amounts is treated as the eligible HRA exemption.

 

 

What Does Salary Include for HRA Calculation?

For HRA calculation, salary does not mean gross salary or total cost to company. Employees should also understand the difference between basic salary and HRA because both components have different purposes and tax treatment.

 

Eligible salary generally includes:

• Basic salary;
• Dearness allowance, but only when it forms part of salary for retirement benefits; and
• Commission calculated at a fixed percentage of the turnover achieved by the employee.

 

The following amounts are generally not included:

• Bonus;
• Overtime payment;
• Employer’s provident fund contribution;
• Other allowances;
• Reimbursements;
• Perquisites; and
• Commission that is not based on a fixed percentage of turnover.

Therefore, using gross salary or CTC in the HRA calculation may result in an incorrect exemption.

 

 

Specified Cities for 50% HRA Calculation

Under the Income-tax Rules, 2026, the list of cities eligible for the 50% salary limit has been expanded.

 

From FY 2026-27, the specified cities include:

• Delhi
• Mumbai
• Kolkata
• Chennai
• Bengaluru
• Hyderabad
• Pune
• Ahmedabad

Employees living in rented accommodation in any of these cities may use 50% of eligible salary for the third part of the HRA calculation.

 

For a rented house situated in any other city, 40% of the eligible salary is considered.

 

Important Transitional Point

For FY 2025-26 and earlier, the 50% limit was restricted to Delhi, Mumbai, Kolkata, and Chennai under the earlier rules. Bengaluru, Hyderabad, Pune, and Ahmedabad became eligible for the higher limit under the Income-tax Rules, 2026 from April 1, 2026.

 

The location of the rented house is relevant. The location of the employer’s office is not the determining factor.

 

 

Step-by-Step HRA Calculation

Use the following steps to calculate the exemption:

 

Step 1: Determine Eligible Salary

Add:

• Basic salary;
• Eligible dearness allowance; and
• Eligible turnover-based commission.

 

Step 2: Calculate Actual HRA Received

Check the salary slips or annual salary statement to determine the total HRA received during the relevant period.

 

Step 3: Calculate Rent Minus 10% of Salary

Deduct 10% of eligible salary from the actual rent paid.

 

Step 4: Apply the City-Based Percentage

Calculate 50% or 40% of eligible salary depending on the location of the rented accommodation.

 

Step 5: Select the Lowest Amount

Compare all three amounts. The lowest amount is the eligible HRA exemption.

 

Step 6: Calculate Taxable HRA

Use the following formula:

 

Taxable HRA = Actual HRA received − HRA exemption

 

 

HRA Calculation Example for a Specified City

Suppose an employee living in Mumbai has the following monthly salary details:

 

Particular	Monthly amount
Basic salary	₹60,000
HRA received	₹30,000
Rent paid	₹25,000
Eligible DA	Nil
City	Mumbai

 

Annual figures

Annual basic salary: ₹60,000 × 12 = ₹7,20,000

 

Annual HRA received: ₹30,000 × 12 = ₹3,60,000

 

Annual rent paid: ₹25,000 × 12 = ₹3,00,000

 

HRA exemption calculation

 

Calculation	Amount
Actual HRA received	₹3,60,000
Rent paid minus 10% of salary: ₹3,00,000 − ₹72,000	₹2,28,000
50% of salary: ₹7,20,000 × 50%	₹3,60,000

 

The lowest amount is ₹2,28,000.

 

Therefore:

 

HRA exemption: ₹2,28,000

 

Taxable HRA: ₹3,60,000 − ₹2,28,000 = ₹1,32,000

 

 

HRA Calculation Example for a Non-Specified City

Suppose an employee living in Surat has the following annual details:

 

Particular	Annual amount
Basic salary	₹6,00,000
HRA received	₹2,40,000
Rent paid	₹2,16,000
Eligible DA	Nil
City	Surat

 

Calculation

 

Calculation	Amount
Actual HRA received	₹2,40,000
Rent minus 10% of salary: ₹2,16,000 − ₹60,000	₹1,56,000
40% of salary: ₹6,00,000 × 40%	₹2,40,000

 

The lowest amount is ₹1,56,000.

 

Therefore:

 

HRA exemption: ₹1,56,000

 

Taxable HRA: ₹2,40,000 − ₹1,56,000 = ₹84,000

 

 

Is HRA Calculated Monthly or Annually?

HRA may be calculated annually when the following details remain unchanged throughout the year:

• Salary;
• HRA received;
• Rent paid; and
• City of residence.

However, a period-wise or monthly HRA calculation should be made when any relevant factor changes during the year.

 

Separate calculations may be necessary when:

• Salary increases during the year;
• Rent changes;
• The employee changes employment;
• The employee shifts from one city to another;
• HRA is received only for part of the year; or
• The employee pays rent only for part of the year.

For example, if an employee moves from a non-specified city to a specified city during the FY, the 40% and 50% limits should be applied separately for the respective periods.

 

 

Can HRA Be Claimed Under the New Tax Regime?

HRA exemption is not available to a salaried taxpayer who selects the new tax regime.

 

Under the new tax regime:

• The HRA received forms part of taxable salary.
• Rent receipts do not create an HRA exemption.
• The employee cannot reduce taxable salary using the HRA calculation formula.

The new tax regime is the default regime. Eligible taxpayers may opt for the old regime in accordance with the applicable conditions and timelines.

 

Employees should compare their final tax liability under both regimes rather than selecting a regime only because HRA exemption is available under the old regime.

 

 

Documents Required for Claiming HRA

An employee should keep proper evidence supporting the HRA claim. Depending on the employer’s requirements and the amount of rent, the documents may include:

 

• Rent receipts;
• Registered or unregistered rent agreement, as applicable;
• Name and address of the landlord;
• Landlord’s PAN, where required;
• Bank statement or other proof of rent payment;
• Salary slips showing HRA;
• Employer declaration form; and
• Details of the relationship with the landlord, where applicable under the prescribed form.

Under the earlier CBDT guidance, employees were required to report the landlord’s PAN to the employer when annual rent exceeded ₹1,00,000. Current salary-reporting forms also provide for reporting landlord information in prescribed cases.

 

Documents should be genuine and consistent with the amount actually paid.

 

 

Can HRA Be Claimed When Rent Is Paid to Parents?

An employee may claim HRA exemption for rent paid to parents if the arrangement is genuine.

 

The employee should:

• Enter into a genuine rental arrangement;
• Actually transfer the rent;
• Keep rent receipts;
• Prefer payment through banking channels;
• Occupy the property as a tenant; and
• Provide the prescribed landlord details and relationship disclosure.

The parent receiving the rent should report it as rental income under the applicable provisions for income from house property.

 

Merely preparing rent receipts without making a genuine payment may result in rejection of the claim.

 

An individual cannot claim HRA by paying rent to himself or herself. Claims involving rent paid to a spouse may also face close scrutiny and must be supported by genuine ownership, tenancy, and payment arrangements.

 

 

Can HRA and Home Loan Benefits Be Claimed Together?

HRA exemption and tax benefits relating to a home loan are governed by separate provisions. Therefore, both may be claimed when the facts support both claims.

 

For example, an employee may:

• Own a house in one city but live on rent in another city because of employment;
• Own a house that has been rented to another person while living in rented accommodation; or
• Live on rent because the owned property is not reasonably available for occupation.

The employee should be able to explain the reason for living in rented accommodation and maintain documents supporting both claims.

 

Owning a residential property does not automatically prevent an employee from claiming HRA. However, the rent payment and occupancy must be genuine.

 

Additional documentation and ownership-related considerations may apply when claiming HRA for jointly owned properties.

 

 

HRA Calculation When Both Spouses Pay Rent

Both spouses may claim HRA only to the extent each spouse actually pays rent and satisfies the applicable conditions.

 

They should not both claim the entire rent paid for the same house.

 

For example, where the total annual rent is ₹3,60,000 and each spouse genuinely pays ₹1,80,000, each may calculate the HRA exemption using the portion paid by that spouse.

 

The payment arrangement should be supported by:

• Rent receipts;
• The rent agreement;
• Bank transactions; and
• Clear allocation of the rental obligation.

 

Is Maintenance Included in HRA Calculation?

Maintenance charges, electricity charges, water charges, parking fees, and similar payments are not automatically treated as rent for HRA purposes.

 

Only the amount genuinely paid for the use of residential accommodation should ordinarily be considered.

 

Where a rent agreement separately identifies maintenance and utility charges, those amounts should not generally be included in the rent used for HRA calculation.

 

A combined payment may require examination of the agreement and the nature of the charges.

 

 

Can HRA Be Claimed Without Rent Receipts?

The exemption is based on the actual payment of rent. Therefore, the employee must be able to support the claim if requested by the employer or Income Tax Department.

 

A rent receipt is common evidence, but additional evidence may include:

• Rent agreement;
• Bank transfer records;
• Landlord confirmation; and
• Proof of occupation.

Failure to provide sufficient evidence may result in the employer refusing the exemption while calculating TDS or the tax authority questioning the claim.

 

 

What If the Employer Does Not Consider the HRA Exemption?

An employee may generally claim an otherwise valid HRA exemption while filing the income tax return, even when the employer did not consider it while deducting tax.

 

However:

• The claim must be legally eligible.
• The employee must select the appropriate tax regime.
• Proper supporting documents must be maintained.
• Salary and exemption details must be correctly reported in the return.

Any excess tax deducted by the employer may be adjusted against the final tax liability or claimed as a refund through the income tax return. Taxpayers should also understand how to avoid mistakes while claiming HRA on ITR, especially when the employer has not considered the exemption in Form 130.

 

 

HRA Exemption and Rent Paid to an NRI Landlord

A tenant paying rent to a non-resident landlord should not assume that a fixed 30% TDS rule always applies. Taxpayers may also refer to this guide on understanding HRA for non-resident Indians for the residency-related conditions and tax implications connected with HRA claims.

 

Payments to a non-resident are generally examined under the provisions governing tax deduction from payments to non-residents. The applicable deduction may depend on:

• Whether the payment is chargeable to tax in India;
• The rate prescribed under domestic law;
• Applicable surcharge and cess;
• A tax treaty, where relevant; and
• Any lower or nil deduction certificate.

The HRA exemption and the tenant’s TDS obligation are separate matters. Professional advice should be obtained where rent is paid to a non-resident landlord.

 

 

HRA Exemption vs Rent Deduction for a Person Not Receiving HRA

HRA exemption applies to salaried employees who receive HRA from an employer.

 

A person who pays rent but does not receive HRA may have to examine a separate rent deduction provision, subject to prescribed conditions.

 

Basis	HRA exemption	Rent deduction without HRA
HRA received from employer	Required	Not received
Primarily available to	Salaried employees	Eligible individuals paying rent
Nature of benefit	Exemption from salary	Deduction from income
Calculation	Least of prescribed HRA limits	Separate prescribed limits
Simultaneous claim	Not ordinarily available for the same period	Subject to conditions

 

An employee should not claim both benefits for the same period in respect of the same rent payment.

 

 

Need Expert Assistance with HRA Calculation?

Correct HRA calculation requires more than checking the rent amount. Salary components, the employee’s city, applicable FY, changes during the year, tax regime, and supporting documents must all be considered.

 

Ebizfiling can assist salaried taxpayers with reviewing salary income, calculating eligible exemptions, comparing tax regimes, and filing income tax returns accurately.

 

Our tax professionals can help you:

• Calculate the eligible HRA exemption;
• Review salary and rent documents;
• Identify the taxable part of HRA;
• Compare the old and new tax regimes;
• Report salary income correctly; and
• File your income tax return.

For professional assistance, contact Ebizfiling at +91 9643203209 or info@ebizfiling.com.

 

 

Conclusion

HRA calculation helps salaried employees determine the exact portion of House Rent Allowance that may be excluded from taxable salary. The exemption is not based only on the rent paid. It is the lowest of actual HRA received, rent paid minus 10% of eligible salary, and the applicable percentage of salary based on the city.

 

From April 1, 2026, Bengaluru, Hyderabad, Pune, and Ahmedabad have joined Delhi, Mumbai, Kolkata, and Chennai in the 50% HRA category. However, the exemption continues to be unavailable under the new tax regime.

 

Employees should use the correct salary components, calculate the benefit period-wise where necessary, and retain genuine rent and payment records before claiming HRA exemption.

 

 

Frequently Asked Questions