HRA Exemption: How Much of Your Rent Is Actually Tax-Free in 2026?
Most salaried professionals in India receive HRA (House Rent Allowance) as part of their salary. Most of them claim less exemption than they’re legally entitled to — either because they don’t know the lowest-of-three rule, they’re paying rent that exceeds the threshold where the landlord’s PAN (Permanent Account Number) becomes mandatory, or they missed that four new cities joined the metro-rate list this year. All three problems have a straightforward fix, and each one has a meaningful number attached to it.
This article covers the exact calculation mechanics, the new 8-city metro list, the document requirements your employer needs before April, and three worked examples at different salary levels. The HRA exemption calculator at the end gives your specific number in under a minute.
✅ Quick self-check — are you leaving money on the table?
If you answered “not sure” to any of these, keep reading — each one is covered in detail below, with the exact fix.
If you declared the new tax regime to your employer — or never declared anything, since the new regime is the default from FY 2026-27 — your HRA component is taxable in full. Zero exemption applies. To claim HRA, you need to opt for the old regime. See our old vs new tax regime guide to calculate whether the switch is worth it at your salary level.
1The Lowest-of-Three Rule — How HRA Exemption Is Calculated
The HRA exemption is not simply “all the rent you pay” or “all the HRA your employer gives you.” It’s the lowest of three separate figures. Rule 279 of the Income-tax Rules, 2026 (which replaced the old Rule 2A from 1 April 2026) sets the calculation, read with Schedule III (Table, Sl. No. 11) of the Income-tax Act, 2025 — the renumbered version of the old Section 10(13A). The underlying formula is unchanged from the pre-2026 law; only the city classification has moved.
Throughout this article, “Basic” means Basic pay plus Dearness Allowance (DA) where it forms part of retirement benefits, plus commission received as a fixed percentage of turnover — not your full Cost to Company (CTC) or gross salary. Most private-sector salaried professionals don’t receive DA, so Basic salary alone is usually the correct figure. If your salary structure includes DA or turnover commission, add those in before running the calculation.
Actual HRA Received
The amount your employer credits as HRA every month. It appears on your payslip as a separate line item.
50% or 40% of Basic
50% of your Basic salary if you live in one of the 8 metro cities. 40% if you live anywhere else.
Rent Paid − 10% of Basic
Actual monthly rent you pay, minus 10% of your monthly Basic salary. Cannot go below zero.
The exemption is the lowest of these three numbers. Any HRA received above the exemption amount is taxable as salary income. This single rule is the reason many employees over-claim or under-claim — most people look at only one of the three without checking which is actually the binding constraint in their situation.
Rule 1 prevents you from claiming exemption on money you never received. Rule 2 prevents people in low-rent cities from sheltering income using a metro-calibrated formula. Rule 3 prevents people paying minimal rent from claiming full HRA as tax-free. All three constraints together ensure the exemption reflects your actual housing cost.
2The New 8-City Metro List — Effective FY 2026-27
The city where you actually live and pay rent — not where your employer is headquartered — determines whether the 50% or 40% rate applies. Under Rule 279 of the Income-tax Rules, 2026, the metro list expanded from four cities to eight effective 1 April 2026.
If you are filing a return for FY 2025-26 (due July 2026), the old four-city list still applies — Delhi, Mumbai, Kolkata, Chennai only. Bengaluru, Hyderabad, Pune, and Ahmedabad were non-metro cities for HRA purposes in FY 2025-26. Don’t apply the new Rule 279 metro list to a previous year’s Income Tax Return (ITR). The expanded list is effective only from 1 April 2026 onward.
The practical effect is meaningful. A salaried professional in Hyderabad or Pune with a monthly Basic of ₹33,750 previously had their HRA Rule 2 calculated at 40% (₹13,500). From FY 2026-27, that same Basic uses the 50% rate (₹16,875). If their rent is high enough that Rule 3 isn’t the binding constraint, this adds ₹3,375/month to their exemption — which at a 20% marginal tax rate saves roughly ₹675/month in taxes.
3Three Worked Examples — At Different Salary and Rent Levels
Example 1 — Hyderabad, ₹75,000 CTC, Rent ₹20,000/Month
A salaried professional in Hyderabad with a ₹9L annual CTC, Basic ₹33,750/month, HRA ₹16,875/month, paying ₹20,000/month rent. Hyderabad is now a metro city under Rule 279.
| HRA Exemption Calculation — Hyderabad, Rent ₹20,000/Month | |
| Rule 1 — Actual HRA received | ₹16,875 |
| Rule 2 — 50% of Basic (metro) | ₹16,875 |
| Rule 3 — Rent (₹20,000) − 10% of Basic (₹3,375) | ₹16,625 |
| HRA Exemption (lowest of three: Rule 3) | ₹16,625/month |
| Taxable HRA (₹16,875 − ₹16,625) | ₹250/month |
| Annual HRA exemption | ₹1,99,500 |
Annual tax saving from this exemption at a 20% marginal tax rate (including 4% health and education cess, so an effective 20.8%): approximately ₹41,500/year. The binding constraint here is Rule 3, not Rule 2 — increasing rent slightly further would push the Rule 3 figure above Rule 2 and cap the exemption there.
Example 2 — Mumbai, ₹1,50,000 CTC, Rent ₹35,000/Month
A product manager in Mumbai with ₹18L annual CTC, Basic ₹67,500/month, HRA ₹33,750/month, paying ₹35,000/month rent.
| HRA Exemption Calculation — Mumbai, Rent ₹35,000/Month | |
| Rule 1 — Actual HRA received | ₹33,750 |
| Rule 2 — 50% of Basic (metro) | ₹33,750 |
| Rule 3 — Rent (₹35,000) − 10% of Basic (₹6,750) | ₹28,250 |
| HRA Exemption (lowest of three: Rule 3) | ₹28,250/month |
| Taxable HRA (₹33,750 − ₹28,250) | ₹5,500/month |
| Annual HRA exemption | ₹3,39,000 |
Annual tax saving at a 30% marginal tax rate (including 4% health and education cess, so an effective 31.2%): approximately ₹1,05,800/year. Rule 3 is still binding — this person would need to pay rent of roughly ₹40,500/month for Rules 1 and 2 to become the constraint instead.
Example 3 — Jaipur (Non-Metro), ₹60,000 CTC, Rent ₹12,000/Month
A software engineer in Jaipur with ₹7.2L annual CTC, Basic ₹27,000/month, HRA ₹10,800/month (40% of Basic, since Jaipur is non-metro), paying ₹12,000/month rent.
| HRA Exemption Calculation — Jaipur (Non-Metro), Rent ₹12,000/Month | |
| Rule 1 — Actual HRA received | ₹10,800 |
| Rule 2 — 40% of Basic (non-metro) | ₹10,800 |
| Rule 3 — Rent (₹12,000) − 10% of Basic (₹2,700) | ₹9,300 |
| HRA Exemption (lowest of three: Rule 3) | ₹9,300/month |
| Taxable HRA (₹10,800 − ₹9,300) | ₹1,500/month |
| Annual HRA exemption | ₹1,11,600 |
Example 4 — Mid-Year Relocation, Non-Metro to Metro
A common situation this article’s target reader actually hits: a transfer or job change mid-year that moves them from a non-metro to a metro city. The exemption must be computed separately for each period — you cannot apply one rate to the whole year. Consider an engineer with Basic ₹40,000/month and HRA ₹20,000/month throughout the year, paying ₹26,000/month rent in both cities: 6 months in a non-metro city (April–September), then 6 months in Bengaluru after an internal transfer (October–March).
| April–September (Non-Metro) — 6 Months | |
| Rule 1 — Actual HRA received | ₹20,000 |
| Rule 2 — 40% of Basic (non-metro) | ₹16,000 |
| Rule 3 — Rent (₹26,000) − 10% of Basic (₹4,000) | ₹22,000 |
| HRA Exemption (lowest of three: Rule 2) | ₹16,000/month |
| October–March (Bengaluru, Metro) — 6 Months | |
| Rule 1 — Actual HRA received | ₹20,000 |
| Rule 2 — 50% of Basic (metro) | ₹20,000 |
| Rule 3 — Rent (₹26,000) − 10% of Basic (₹4,000) | ₹22,000 |
| HRA Exemption (lowest of three: Rules 1 & 2, tied) | ₹20,000/month |
Correct annual exemption, computed period-by-period: (₹16,000 × 6) + (₹20,000 × 6) = ₹2,16,000. If this person (or their employer’s payroll system) wrongly applied the metro 50% rate to the full year instead of splitting it by period, the claimed exemption would come to ₹2,40,000 — a ₹24,000 over-claim that isn’t legally valid and can trigger a mismatch notice, worth roughly ₹5,000 in tax and interest exposure at a 20% marginal rate. The same logic applies in reverse — moving from a metro to a non-metro city mid-year — where under-splitting causes an under-claim instead.
In all three cases, Rule 3 is the binding constraint — not Rule 1 or Rule 2. This is the most common situation for salaried professionals paying rent at or slightly above market rates for their city. Rule 2 (the city-based 50%/40% ceiling) becomes the binding constraint only when you pay substantially above-average rent for your Basic salary level — a rarer scenario, but worth checking if you’re in a very high-rent micro-location within a metro. Example 4 shows the exception: when relocating mid-year, Rule 2 becomes binding for part of the year because the applicable percentage itself changes.
4Documents You Must Submit to Your Employer
HRA exemption doesn’t happen automatically. Your employer requires supporting documents before adjusting your Tax Deducted at Source (TDS) — collected via Form 124, the declaration form under Rule 205 of the Income-tax Rules, 2026. Form 124 replaced the older Form 12BB from 1 April 2026 onward, and it adds one new requirement: you must now explicitly state your relationship with the landlord. These are the documents that matter:
📋 HRA Document Checklist — Form 124
Your employer will deduct higher TDS throughout the year — treating the full HRA as taxable. The exemption isn’t lost permanently. You can still claim it when filing your Income Tax Return (ITR), and the excess TDS comes back as a refund. But you’ll have had that extra TDS deducted every month until the ITR refund processes, which can take weeks to months. Getting the documents in before your employer’s deadline (typically January–February for full-year adjustment) is the better path.
Three situations come up often enough to name specifically. HR says the submission window is closed: you haven’t lost the exemption — claim it directly in your ITR with the same documents; only your monthly TDS timing is affected, not your legal entitlement. Your employer applied the wrong city classification (e.g., still treating Hyderabad as non-metro after 1 April 2026): flag it in writing with a reference to Rule 279 of the Income-tax Rules, 2026, and ask payroll to correct it going forward; you can still claim the correct amount yourself at ITR time for the difference. You work at a small company with no formal HR/payroll process: Form 124 is filed with the employer for TDS purposes only — it doesn’t need a large HR department to process. If your employer genuinely won’t handle it, you’re not blocked; you can still claim the full exemption when you file your own ITR, since the underlying entitlement isn’t created by your employer’s cooperation.
5Paying Rent to Parents — It Works, With Conditions
A common and perfectly legal strategy: a salaried professional living in their parents’ home pays rent to the parents, claims HRA exemption on it, and the parents receive rental income. Both sides need to handle this correctly for it to hold up.
What makes it legitimate:
- The house must be owned by the parent (or spouse of the parent) — not by the taxpayer themselves.
- A genuine rent agreement must exist, naming the parent as landlord and the salaried professional as tenant, with a specific monthly amount.
- Actual rent receipts must be issued — the same format as any other landlord.
- The parent must declare the rental income received in their own ITR. It can be offset by their standard deduction (30% of rent as a flat deduction under the old regime for property income) and any municipal taxes paid, but the rental income must appear in their filing.
- Bank transfers are the safest payment method — they create a clear audit trail of actual rent changing hands.
- From FY 2026-27, Form 124 requires you to explicitly disclose that your landlord is a relative. This isn’t a new restriction — it makes an already-legal arrangement more visible to the tax department, which cross-checks it against your parent’s declared rental income.
Paying rent to a spouse for a jointly-owned or spouse-owned property is specifically disallowed for HRA purposes by judicial precedent and tax officer practice. Paying rent in cash without receipts or any paper trail is risky even if the relationship is legitimate. Any arrangement where the rental income never appears in the parent’s ITR is a red flag in an assessment.
6The Four Mistakes That Reduce Your HRA Exemption
These errors cost salaried professionals real money every year — each one is straightforward to avoid once you know where to look.
Mistake 1 — Using the wrong city classification
Applying the 40% non-metro rate to a city that moved to the metro list in FY 2026-27 (Bengaluru, Hyderabad, Pune, Ahmedabad). For someone on ₹40,000 Basic, this means using ₹16,000 instead of ₹20,000 for Rule 2 — a ₹4,000/month difference in the ceiling, which can cost ₹9,600–₹14,400 in annual tax depending on the marginal rate.
Mistake 2 — Not submitting the landlord’s PAN on time
Paying rent above ₹8,333/month without providing the landlord’s PAN to the employer in Form 124. The employer is legally required to disallow the exemption without this. Some employees think they can claim it at ITR time regardless — they can, but they need to include the landlord PAN there too, and any discrepancy between Form 168 (the renumbered version of the old Form 26AS, your annual tax credit statement) and the ITR claim can trigger a notice.
Mistake 3 — Claiming exemption without actual rent payment proof
Generating backdated rent receipts for a period where no actual rent was paid. Apart from being fraudulent, this is increasingly easy for tax authorities to identify when the landlord’s income tax return doesn’t reflect corresponding rental income — cross-referencing between the two is routine in assessments.
Mistake 4 — Forgetting HRA is unavailable in the new regime
Employees who switched to the new regime (or remained on the default) but continue submitting rent receipts to their employer expecting a TDS reduction. The employer cannot grant HRA exemption under the new regime. The declaration to the employer and the ITR filing must match on regime choice for the year.
HRA isn’t a benefit the government gives you — it’s a deduction you have to actively claim, with the right documents, in the right regime, using the correct city rate. Miss any one of those, and the number shrinks or disappears.
7Which Path Applies to You — And What Actually Triggers a Notice
Not everyone reading this actually qualifies for the standard HRA exemption. Here’s how to place yourself correctly before you calculate anything.
You receive HRA in your salary
Use the lowest-of-three rule under Rule 279 (Sections 1–4 above). This is the standard path for most salaried professionals with an HRA line item on their payslip.
No HRA in salary, and you don’t own a home
You may claim a deduction under Section 80GG (renumbered Section 134 under the Income-tax Act, 2025) instead — capped at ₹5,000/month, far lower than typical HRA exemption amounts.
No HRA, and you (or your spouse) own the home you live in
Neither path applies to your own rent — you’re not paying rent to anyone. A home loan on that property may still qualify for interest deduction under Section 22 (renumbered from Section 24(b)) if applicable.
Yes, as long as you’re genuinely renting and living in that home, HRA exemption isn’t conditional on commuting to an office every day. If you work from your hometown for part of the year but keep a rented city apartment mostly unoccupied purely to preserve the exemption, that’s a different situation — the exemption is meant for your actual place of residence, not a nominal address. If your employer’s office is in one city and you live and pay rent in another for genuine reasons (fully remote role, hybrid schedule with occasional travel), the city where you actually reside is what determines the metro/non-metro rate — not your employer’s registered office location.
Four patterns account for most HRA-related notices in practice: rent claimed that’s significantly above the fair market rate for the property and locality; a landlord PAN that doesn’t match the name on the rent receipts; a related-party (parent/spouse) rental arrangement where the relationship wasn’t disclosed on Form 124 and the landlord’s ITR shows no matching rental income; and a mismatch between the exemption claimed in your ITR and the TDS credit reflected in Form 168 (formerly Form 26AS). None of these are triggered by a genuine, correctly-documented claim — they’re triggered by claims that don’t have a real, disclosed transaction behind them.
8HRA Exemption Calculator
Enter your monthly figures to compute the exact HRA exemption under Rule 279 of the Income-tax Rules, 2026 — using the correct lowest-of-three logic and the updated metro city rate.
Calculate Your Monthly HRA Exemption
| Rule 1 — Actual HRA received | — |
| Rule 2 — 50% of Basic (metro) | — |
| Rule 3 — Rent minus 10% of Basic | — |
| Binding Rule | — |
| Monthly Taxable HRA | — |
| Annual HRA Exemption | — |
| Annual Landlord PAN required? | — |
The Bottom Line
HRA exemption has three moving parts — what you receive, where you live, and what you actually pay in rent — and the government takes the most conservative of the three. That’s the number on your payslip. Four new cities joined the metro list this year, which silently increased the Rule 2 ceiling for a lot of people in Bengaluru, Hyderabad, Pune, and Ahmedabad — check whether your employer has updated this. Submit the right documents, in the right regime, before your employer’s January deadline, and the tax saving is real. Skip the paperwork and it evaporates.
❓ Frequently Asked Questions
The HRA exemption equals the lowest of three figures: (1) the actual HRA received from your employer, (2) 50% of your Basic salary if you live in one of the 8 metro cities (or 40% in any other city), and (3) the actual rent you pay minus 10% of your Basic salary. The exemption amount is tax-free; any HRA above that is taxable. Rule 279 of the Income-tax Rules, 2026 governs this calculation from FY 2026-27.
Eight cities qualify for the 50% of Basic HRA rate under Rule 279, Income-tax Rules, 2026 (effective 1 April 2026): Delhi, Mumbai, Kolkata, Chennai, Bengaluru, Hyderabad, Pune, and Ahmedabad. This expanded from four cities (Delhi, Mumbai, Kolkata, Chennai only) under the old Rule 2A of the Income-tax Rules, 1962. The expanded list applies to FY 2026-27 onward; FY 2025-26 returns still use the old four-city list.
No. HRA exemption is not available under the new tax regime for FY 2026-27. The new regime is the default from this year — if you haven’t explicitly opted for the old regime, your entire HRA component is taxable. To claim HRA, you must opt for the old tax regime by declaring it to your employer at the start of the financial year or by selecting it when filing your ITR.
Yes, if annual rent paid exceeds ₹1,00,000 (more than ₹8,333 per month). Under Rule 205 of the Income-tax Rules, 2026, you must furnish the landlord’s PAN in Form 124 submitted to your employer — Form 124 replaced the older Form 12BB from 1 April 2026. Without it, your employer cannot grant the HRA exemption for TDS purposes. You can still claim it in your ITR, but you must provide the landlord PAN there as well. If the landlord doesn’t have a PAN, they must provide a self-declaration to that effect.
Yes, paying rent to parents for living in their property is allowed, provided the arrangement is genuine: a rent agreement exists, monthly rent receipts are issued, payments are made by bank transfer (leaving a trail), the relationship is disclosed on Form 124, and the parent declares the rental income in their own income tax return. Paying rent to a spouse for a spouse-owned property is specifically disallowed. The same lowest-of-three formula applies to rent paid to parents as to any other landlord.
Submit Form 124 to your employer containing: monthly rent receipts (amount, period, landlord name/address), your rent agreement or lease deed, your relationship with the landlord, and the landlord’s PAN (mandatory if annual rent exceeds ₹1L). Most employers have a submission window in December or January for the current year’s TDS adjustment. If you miss this window, submit the same documents when filing your ITR to claim the exemption as a refund on excess TDS deducted.
If your CTC doesn’t include an HRA component, you cannot claim the standard HRA exemption under Rule 279. However, you may be able to claim a deduction under Section 80GG (renumbered Section 134 under the Income-tax Act, 2025) for rent paid when HRA is not received, subject to conditions: you, your spouse, and minor children must not own any residential property, and you must actually pay rent. The Section 134 ceiling is ₹5,000/month (₹60,000/year) — significantly lower than HRA exemption amounts at typical salary levels.
Yes, under the old tax regime, you can claim both simultaneously — provided you’re genuinely renting the home you live in and separately repaying a home loan on a different property (such as your hometown property, or an under-construction flat). You cannot claim HRA if you own and live in the same property you’re paying your Equated Monthly Instalment (EMI) on. This combination — HRA for the rented city home and Section 22 interest (renumbered from the old Section 24(b)) for the owned property elsewhere — is a common and legitimate arrangement for professionals in metro cities.
A job change or transfer that moves you between cities. A promotion or appraisal that changes your Basic salary or HRA component. Moving in with (or out of) a parent-owned home. Switching between the old and new tax regime at the start of a financial year. Any of these changes your exemption calculation, and the numbers won’t update themselves — rerun the calculator above when they happen.
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Income-tax Rules, 2026 — Central Board of Direct Taxes (CBDT) Notification No. G.S.R. 198(E), dated 20 March 2026, Gazette of India, Part II, Section 3(i), made under section 533 of the Income-tax Act, 2025 (30 of 2025). Full text: incometaxindia.gov.in — Income-tax Rules, 2026.
Income-tax Act, 2025 (30 of 2025), assented 21 August 2025: incometaxindia.gov.in — Income-tax Act, 2025.
CBDT reference document, “Employees – Benefits Allowable” (confirms the Basic + DA + turnover-commission salary definition and Circular No. 08/2013, dated 10 October 2013, on the landlord-PAN requirement): incometaxindia.gov.in.
Income Tax Department official HRA tool: incometaxindia.gov.in — House Rent Allowance calculator.
💬 Quick Question for You
Did you know your city’s HRA rate changed this year — and did your employer update their TDS calculation accordingly?