HRA Exemption — Complete Guide for FY 2025-26

What is HRA Exemption?

HRA (House Rent Allowance) is a component of your salary. If you live in rented accommodation, a portion of the HRA you receive is exempt from income tax under Section 10(13A). This is called HRA exemption.

Important: HRA exemption is only available under the old tax regime. If you've chosen the new tax regime, your entire HRA is taxable.

The HRA Exemption Formula

HRA exemption = minimum of these three amounts:

Whichever is lowest becomes your HRA exemption — that amount is deducted from your taxable income.

Metro vs Non-Metro Cities

Only four cities qualify as metro for HRA purposes:

• Mumbai (including Thane, Navi Mumbai)
• Delhi (Delhi municipal limits only — not Noida, Gurgaon, Faridabad)
• Kolkata
• Chennai

All other cities — Bengaluru, Hyderabad, Pune, Ahmedabad, Kochi etc. — are non-metro and get only 40% of basic salary as HRA exemption ceiling.

Worked Example

Rahul works in Bengaluru. Basic salary: ₹50,000/month. HRA received: ₹20,000/month. Rent paid: ₹25,000/month.

1. Actual HRA received: ₹20,000
2. Rent − 10% basic: ₹25,000 − ₹5,000 = ₹20,000
3. 40% of basic (non-metro): ₹20,000

All three are equal at ₹20,000. HRA exemption = ₹20,000/month = ₹2,40,000/year. At 30% bracket, this saves ₹74,880 in tax annually.

Documents Required to Claim HRA

• Rent receipts (monthly or quarterly) — include landlord name, address, amount, signature
• Rent agreement
• If annual rent exceeds ₹1 lakh: landlord's PAN card copy is mandatory
• Submit Form 12BB to employer at start of financial year with rent details

Common HRA Mistakes

• Paying rent to parents: Allowed — but parents must show it as rental income in their tax return
• Paying rent to spouse: Not allowed — tax authorities disallow this
• No rent receipts: You can still claim HRA but risk rejection during scrutiny — always keep receipts
• Choosing new regime: If your HRA exemption is large (₹2L+/year), old regime may save significantly more tax
• Not submitting Form 12BB: Employer will deduct TDS as if no HRA exemption exists — you get refund later but it blocks cash flow

HRA + Home Loan — Can You Claim Both?

Yes — if you own a house in one city and rent in another city for work. For example, owning a house in Pune but renting in Mumbai for work allows you to claim both HRA exemption (for Mumbai rent) and home loan deductions (for Pune property).

Even in the same city, you can claim both if you can justify why you're renting despite owning — though this is more likely to face scrutiny.