HRA Exemption Calculation FY 2025-26 — Old Regime Formula, Metro vs Non-Metro, Parents-Rent + Worked Examples

📅 IT Act 2025 transition note: The Income-tax Act, 1961 stands repealed effective 1 April 2026 per Section 536 of the Income-tax Act, 2025. The House Rent Allowance (HRA) exemption under Section 10(13A) of the 1961 Act moves to the corresponding provision in Chapter III of the 2025 Act; the exemption mechanics (least of 50%/40% basic / actual rent − 10% basic / actual HRA) carry forward substantively unchanged. For FY 2025-26 (AY 2026-27 — last cycle under 1961 Act), Section 10(13A) references remain operative. Note: HRA exemption is NOT available under the new tax regime (Section 115BAC). See the IT Act 2025 transition reference.

Why HRA exemption matters in FY 2025-26 (Old Regime only)

House Rent Allowance (HRA) is the most-claimed salary exemption in India by volume — but in FY 2025-26 (AY 2026-27), the calculus around claiming it has shifted materially.

The fundamental rule: HRA exemption under Section 10(13A) is available only under the Old Tax Regime. It is one of the deductions explicitly stripped out of the New Regime — alongside Section 80C, Section 80D, and most other Chapter VI-A deductions.

With the Finance Act 2025 raising the new-regime Section 87A rebate to ₹60,000 (zero tax up to ₹12 lakh taxable income → ~₹12.75 lakh gross salary after the ₹75k standard deduction), the regime-choice math has tilted further toward the new regime for most middle-income taxpayers. HRA remains operationally relevant for:

• High-income earners paying substantial rent in expensive cities
• Taxpayers stacking HRA + Section 80C + 80CCD(1B) NPS + 80D + Section 24(b) home loan interest to compress taxable income meaningfully below the new-regime equivalent
• Anyone with substantial home loan interest under Section 24(b) where the combined Old Regime deduction stack beats the New Regime

For the regime-switch math and Form 10-IEA mechanics, see the New vs Old Tax Regime comparison. For the broader Section 80C context, see the Section 80C Deductions spoke.

What HRA actually is

HRA is a salary component paid by the employer to compensate the employee for residential rent costs. Receiving HRA does not automatically make it tax-free:

• If the taxpayer lives in their own house and does not pay rent → HRA received is fully taxable.
• If the taxpayer lives with parents or family and does not pay rent → HRA received is fully taxable.
• If the taxpayer actually pays rent for residential accommodation → the exempt portion is calculated per the Rule 2A least-of-three formula below.

The exemption mechanism is anchored in Section 10(13A) of the Income Tax Act 1961 and the calculation rules are in Rule 2A of the Income Tax Rules 1962.

The HRA formula — least of three

Under Rule 2A, the HRA exemption is the least of these three amounts for the period during which the HRA was received AND rent was actually paid:

1. Actual HRA received from the employer during the period.
2. Rent paid minus 10% of Salary for the same period.
3. The metro / non-metro percentage of Salary:
   • 50% of Salary for residence in a metro city (Mumbai, Delhi, Kolkata, Chennai)
   • 40% of Salary for residence in a non-metro city

”Salary” for the HRA formula — what’s included

The definition of “Salary” for Rule 2A is narrower than gross salary or CTC. It includes:

• Basic Pay
• Plus Dearness Allowance (DA) — only if the employment terms stipulate that DA forms part of retirement / provident-fund benefits
• Plus Commission — only if the commission is calculated as a fixed percentage of turnover achieved by the employee

What’s excluded: special allowance, conveyance allowance, medical allowance, LTA, bonus, perquisites, flat-amount commissions, and any other allowance not falling into the three buckets above. Treating any of these as “Salary” in the formula inflates the 10%-of-salary deduction in Condition 2 and the 40%/50% cap in Condition 3 — both of which reduce the exempt amount.

Metro vs non-metro — the 50% vs 40% question

The Income Tax Act’s classification for HRA purposes is strict and old:

• HRA metro cities (50% factor): Mumbai, Delhi, Kolkata, Chennai. That’s it. Four cities.
• HRA non-metro cities (40% factor): Everywhere else — including Bengaluru, Hyderabad, Pune, Gurugram, Noida, Ahmedabad, Chandigarh, Lucknow, Jaipur, Surat, Coimbatore, and every other city not in the four-city metro list.

This is a frequent trap. Bengaluru and Hyderabad are large modern-tech-hub cities and feel like “metros” in everyday usage — but for HRA, they are non-metro. Applying the 50% factor where 40% applies inflates exemption claims and surfaces during return processing or scrutiny as a math discrepancy.

Worked examples

Example 1 — Mumbai resident (metro)

• Basic Salary: ₹50,000/month → ₹6,00,000/year
• HRA received: ₹25,000/month → ₹3,00,000/year
• Rent paid: ₹30,000/month → ₹3,60,000/year

Apply the formula:

1. Actual HRA: ₹3,00,000
2. Rent paid minus 10% of Basic: ₹3,60,000 − ₹60,000 = ₹3,00,000
3. 50% of Basic (metro): ₹3,00,000

Least of the three = ₹3,00,000. Entire HRA fully exempt. Taxable salary unchanged.

Example 2 — Bengaluru resident (non-metro)

• Basic Salary: ₹40,000/month → ₹4,80,000/year
• HRA received: ₹20,000/month → ₹2,40,000/year
• Rent paid: ₹25,000/month → ₹3,00,000/year

Apply the formula:

1. Actual HRA: ₹2,40,000
2. Rent paid minus 10% of Basic: ₹3,00,000 − ₹48,000 = ₹2,52,000
3. 40% of Basic (non-metro): ₹1,92,000

Least of the three = ₹1,92,000. HRA exempt: ₹1,92,000. Balance ₹48,000 added to taxable salary.

Example 3 — Pune resident with low rent

• Basic Salary: ₹60,000/month → ₹7,20,000/year
• HRA received: ₹30,000/month → ₹3,60,000/year
• Rent paid: ₹5,000/month → ₹60,000/year (paying-guest accommodation)

Apply the formula:

1. Actual HRA: ₹3,60,000
2. Rent paid minus 10% of Basic: ₹60,000 − ₹72,000 = negative → ₹0
3. 40% of Basic (non-metro): ₹2,88,000

Least of the three = ₹0. No HRA exemption. Entire ₹3,60,000 HRA fully taxable. The Condition-2 zero floor is a frequent reason why low-rent or paying-guest situations yield no HRA benefit despite the employee receiving substantial HRA.

Landlord PAN requirement

Per CBDT Circular No. 8/2013, if total rent paid during the FY exceeds ₹1,00,000 (~₹8,333 per month), the taxpayer must furnish the landlord’s PAN to the employer:

• Submission: landlord PAN, name, address declared in Form 12BB at year-end employer-proof-collection stage.
• If landlord has no PAN: collect a Form 60 declaration from the landlord and submit to the employer in lieu of PAN.
• Section 194-IB TDS: separately, if monthly rent to a resident landlord exceeds ₹50,000, the tenant must deduct TDS at 2% (rate cut by Finance Act 2024 from the earlier 5%) and issue Form 16C to the landlord. This is independent of the HRA claim — see the Form 16 vs Form 16A reference.

The Income Tax Department cross-matches landlord PANs declared in employee Form 12BBs against the landlord’s own ITR — if the landlord does not report the rental income, the employee’s HRA claim is liable to disallowance under scrutiny, and an inflated penalty under Section 270A (misreporting of income, up to 200% of tax sought to be evaded) may apply where the discrepancy looks deliberate.

Paying rent to parents — yes, allowed (with conditions)

A common joint-family setup: the salaried employee lives in the parent-owned home and pays the parents rent. This is permissible under Section 10(13A); ITAT rulings have repeatedly upheld it where the arrangement is commercially genuine. Conditions for a defensible claim:

1. Ownership — the property must be legally owned by the parent (or jointly by both parents). The employee cannot pay rent to a parent who is themselves a tenant or who has no ownership stake.
2. Formal rent agreement — written rent agreement specifying the monthly rent, security deposit, and period. Notarisation strengthens the position.
3. Banking trail — rent paid via NEFT / RTGS / UPI to the parent’s bank account every month. Cash payments without bank evidence are routinely rejected during scrutiny.
4. Parent reports the rental income — the parent declares the rent in their ITR as “Income from House Property” and pays tax accordingly. They can claim the 30% standard deduction under Section 24(a) on the gross rental income.
5. Arithmetic plausibility — the rent should be reasonable for the property’s location and size; an inflated rent that looks designed to maximise HRA exemption invites scrutiny.

The tax-arbitrage rationale: if the parent is retired or in a lower tax bracket, shifting rental income from the high-earning child’s bracket to the parent’s bracket reduces the family’s aggregate tax — net of the 30% Section 24(a) standard deduction the parent claims. This is a common, legitimate planning structure.

Spouse rent: paying rent to a spouse is generally rejected because spouses living together are typically viewed as a single economic unit; the rent claim is liable to disallowance.

HRA + Home Loan interest — can you claim both?

Section 10(13A) (HRA) and Section 24(b) (home loan interest, up to ₹2L for self-occupied property) are different exemption sections. The interaction:

• Same property — own it, occupy it, and pay home loan EMI: can claim Section 24(b) interest + Section 80C principal repayment. Cannot claim HRA (no rent being paid).
• Different cities — rented home in city A + owned home with loan in city B: both fully allowed. Classic example: transferred employee with home loan on family residence in hometown but renting in current work city.
• Same city, different homes — own a home but rent another: allowed where a bona fide commercial / family reason exists (proximity to workplace, family-size mismatch with owned property, owned property let-out for income). The AO can ask for substantiation during scrutiny; documentation of the rationale and the let-out income (if any) strengthens the position.

How to claim HRA in salary + ITR

During the FY (salaried employees)

• Q1 declaration (April-May): employee declares estimated rent + HRA usage in the investment-declaration cycle. Employer sizes monthly TDS under Section 192 with the estimated HRA exemption built in.
• Q4 proofs (Jan-Feb): employee submits rent agreement + rent receipts + landlord PAN via Form 12BB. Employer locks in the final HRA exemption for Form 16 issuance.
• Form 16 Part B reflects gross salary minus exempt HRA → taxable salary.

At ITR filing

• Old Regime selection is the first prerequisite — HRA is unavailable under New Regime; the ITR portal will block the claim if Old Regime is not actively chosen. For form-specific mechanics see the ITR Form Selector Guide.
• HRA exemption auto-populates from Form 16 into the salary schedule of ITR-1 or ITR-2.
• If the employer did not consider HRA in TDS (proofs submitted late, or employee changed jobs mid-year), the exemption can still be claimed at ITR filing by computing the Rule 2A formula manually and reducing taxable salary accordingly. Resulting refund is processed by CPC Bengaluru.
• For end-to-end ITR preparation, see the ITR Filing service.

Common HRA mistakes

1. Claiming HRA under New Regime — the system disallows it; the claim is rejected at processing.
2. Treating Bengaluru / Hyderabad / Gurugram as metro — applying 50% factor inflates the Condition-3 ceiling, leading to claim mismatch during processing.
3. Inflated or fabricated landlord PAN — the IT Department cross-matches the landlord’s ITR. Disallowance + Section 270A 200% misreporting penalty exposure where the discrepancy looks deliberate.
4. Cash rent payments without bank evidence — routinely disallowed during scrutiny. Bank-channel payments are the operational standard.
5. Claiming HRA on a self-occupied owned property — straightforward disallowance.
6. Including flat commissions or bonuses in “Salary” — the Rule 2A salary definition is narrow (Basic + qualifying DA + percentage-of-turnover commission only). Including other allowances inflates the 10%-of-salary deduction and the 40/50% ceiling.
7. Forgetting Section 194-IB TDS — monthly rent > ₹50,000 triggers a separate 2% TDS deduction obligation on the tenant; this is distinct from the HRA exemption claim itself and is the tenant’s compliance obligation regardless of HRA claim status.
8. Mid-year city changes not split correctly — if the employee moves from a non-metro to a metro city during the FY, the formula is applied period-wise (50% factor only for the metro period, 40% for the non-metro period). Treating the entire year as metro or non-metro is incorrect.

For broader Old-Regime deductions context, see the Section 80C spoke and the Income Tax overview pillar.