Short answer: your HRA exemption is the least of three numbers: (1) the HRA you actually receive, (2) rent paid minus 10% of your Basic+DA, and (3) 50% of Basic+DA if you live in a metro (Delhi, Mumbai, Kolkata, Chennai) or 40% elsewhere. Whatever is smallest is tax-free; the rest of your HRA is taxed as salary. And one rule that overrides everything: HRA exemption exists only in the old tax regime – if you’ve opted for the new regime, stop here (or read when the old regime is still worth it).
The rule, precisely
Section 10(13A) of the Income Tax Act, with Rule 2A, exempts the least of:
- Actual HRA received for the period
- Rent paid – 10% of salary (salary = Basic + Dearness Allowance, for the period the rent was paid)
- 50% of salary (metro) or 40% of salary (non-metro)
Three details people miss:
- “Metro” means exactly four cities: Delhi, Mumbai, Kolkata, Chennai. Bengaluru, Hyderabad, Pune, Gurugram, Noida – all 40%, regardless of rent levels. (Yes, this is widely considered outdated. It is still the law.)
- The comparison is done for the period, not the year in one shot. If your salary, rent, or city changed mid-year, compute each stable period separately and add them up – the HRA Calculator has a partial-period mode for exactly this.
- No rent, no exemption. If you live in your own house or pay no rent, HRA is fully taxable.
Example 1: Mumbai renter (metro, straightforward)
Priya works in Mumbai. Basic Rs. 60,000/month, HRA Rs. 30,000/month, rent Rs. 35,000/month. Annual figures: Basic Rs. 7,20,000 – HRA Rs. 3,60,000 – Rent Rs. 4,20,000.
| Test | Computation | Amount |
|---|---|---|
| 1. Actual HRA | – | Rs. 3,60,000 |
| 2. Rent – 10% of Basic | 4,20,000 – 72,000 | Rs. 3,48,000 |
| 3. 50% of Basic (metro) | 50% * 7,20,000 | Rs. 3,60,000 |
Exempt: Rs. 1,32,000. This is legitimate – the Income Tax Appellate Tribunal has upheld rent-to-parents claims – but only when it’s real:
- The parent must own the house (not jointly with you), and you must not own it.
- Pay by bank transfer, monthly, with a simple rent agreement. Cash “payments” reconstructed at filing time are the classic audit failure.
- Your parent must declare the rent as income in their return. Often the family still wins: if your mother is in the 0% or 5% slab and you’re in 30%, the household saves the difference – and she can claim the 30% standard deduction on rental income under Section 24(a).
- Mismatch risk: your claim appears in your employer’s TDS filings; her declared rent appears in her return. The department cross-checks via AIS. If the two don’t match, expect a notice.
The paperwork that makes or breaks the claim
- Rent receipts or agreement – your employer needs them to factor the exemption into monthly TDS (Form 12BB declaration).
- Landlord’s PAN if annual rent exceeds Rs. 1,00,000 – no PAN means the employer must disallow the exemption at source (you can still claim at filing, with proof, but expect scrutiny).
- Actually pay the rent. Bank trail beats everything. The recent wave of HRA notices is driven by AIS matching – claimed rent with no corresponding money movement is trivially detectable now.
- Missed submitting proofs to your employer? You can still claim the exemption directly in your return – the employer’s TDS just runs higher until your refund arrives.
Common questions
Can I claim HRA and a home-loan deduction together? Yes, if genuinely applicable – e.g., you own a house in one city (claiming 24(b) interest) but rent in another for work. Same-city claims invite scrutiny and need a credible reason.
My employer pays no HRA but I pay rent – anything for me? Section 80GG, capped at the least of Rs. 5,000/month, 25% of total income, or rent – 10% of income. Much smaller, old regime only, and requires that you and your spouse own no home where you live.
Does the 10% subtraction use gross salary? No – Basic + DA only. Special allowances and bonuses are excluded from “salary” for this rule, which is why the Basic-vs-allowance split in your CTC structure changes your exemption.
I moved cities mid-year – which rate applies? Each period gets its own rate: months in Mumbai at 50%, months in Pune at 40%. Compute separately and add – or use the partial-period mode in the HRA Calculator.
Calculators referenced: HRA Exemption – CTC Breakup – In-Hand Salary – TDS on Salary. Based on Section 10(13A) and Rule 2A as applicable at the time of writing; thresholds and procedure can change – verify for the current financial year. Not tax advice.
