HRA exemption explained, with worked examples

House Rent Allowance (HRA) is one of the most valuable exemptions for salaried employees who pay rent, available under the old tax regime. The catch is that the exemption is not simply the HRA you receive; it is the least of three amounts, and getting the calculation right can save an employee real money.

The least-of-three rule

Under Section 10(13A) of the Income Tax Act, the exempt HRA is the lowest of these three figures:

1. The actual HRA received.
2. Rent paid minus 10% of Basic + DA.
3. 50% of Basic + DA for metro cities, or 40% for non-metro cities.

Only four cities count as metro for this purpose: Delhi, Mumbai, Kolkata and Chennai. Everywhere else uses the 40% figure.

A worked example

Take a monthly Basic + DA of ₹40,000, HRA received of ₹20,000, and rent paid of ₹22,000 in a metro city.

Test	Calculation	Amount
Actual HRA received	given	₹20,000
Rent minus 10% of basic	22,000 − 4,000	₹18,000
50% of basic (metro)	50% of 40,000	₹20,000
Exempt (least of three)		₹18,000

So ₹18,000 is exempt and ₹2,000 of HRA is taxable each month. Over a year, that is ₹2,16,000 exempt.

Now change the city to non-metro. The third test becomes 40% of ₹40,000 = ₹16,000, which is now the lowest, so only ₹16,000 is exempt and ₹4,000 becomes taxable.

Why the rent-minus-10% test matters

The second test, rent paid minus 10% of Basic + DA, is what limits the exemption for employees who pay low rent relative to their salary. If someone earns a high basic but pays modest rent, this test caps their exemption. It rewards genuinely high rent, which is the point of the allowance.

Documentation and the landlord PAN rule

To claim HRA, an employee must actually pay rent. Beyond a threshold of annual rent (commonly ₹1,00,000 a year), the employee must provide the landlord's PAN. Rent paid to a family member is allowed, but is scrutinised, so a genuine arrangement, a rent agreement and receipts matter. Employees who cannot produce proofs at year-end lose the exemption when payroll trues up.

What if there is no HRA in the salary structure

An employee who pays rent but whose salary has no HRA component cannot claim the 10(13A) exemption. They may instead claim a smaller deduction under Section 80GG, subject to its own limits and conditions. This is why a sensible salary structure includes an HRA component for employees likely to pay rent.

Common mistakes to avoid

• Assuming the full HRA received is exempt.
• Using the metro rate for a non-metro city, or vice versa.
• Forgetting the landlord PAN requirement above the rent threshold.
• Claiming HRA under the new regime, where it is not available.

Frequently asked questions

Can I claim HRA and a home loan together? Yes, if you genuinely pay rent where you live and own a property elsewhere or that is let out, subject to conditions.

Is HRA available under the new regime? No, HRA exemption is an old-regime benefit.

What counts as a metro city? Delhi, Mumbai, Kolkata and Chennai.

Key takeaways

• HRA exemption is the least of actual HRA, rent minus 10% of basic, and 50%/40% of basic.
• Only four cities get the 50% metro rate.
• Proper documentation and landlord PAN above the threshold are essential.
• HRA is an old-regime benefit.

NeevHR captures the rent declaration, computes the exemption correctly by city, and reduces taxable income so TDS reflects it through the year.