How Does the HRA Exemption Work?
If you receive House Rent Allowance and pay rent, part of that HRA can be exempt from tax. The exempt amount is the least of three figures: the actual HRA you received, the rent you paid minus 10% of your basic salary plus DA, and 50% of basic plus DA if you live in one of the specified big cities (40% anywhere else). Whatever remains of the HRA is taxable. One thing to know upfront: this exemption exists only in the old tax regime. Under the default new regime, HRA is fully taxable, so compare both regimes in the income tax calculator before deciding.
The 50% City List Doubled This Year
For decades, only Mumbai, Delhi, Kolkata and Chennai qualified for the 50% limit. The Income-tax Rules, 2026, effective 1 April 2026, expanded the list to eight cities: Mumbai, Delhi, Kolkata, Chennai, Bengaluru, Hyderabad, Pune and Ahmedabad. If you rent in one of the four newly added cities, your exemption can rise meaningfully from FY 2026-27. Returns for FY 2025-26 and earlier still follow the old four-city rule.
A Worked Example
Take a Bengaluru renter with basic plus DA of ₹60,000 a month, HRA of ₹24,000 a month, and rent of ₹30,000 a month. The three figures work out like this. HRA received: ₹24,000. Rent minus 10% of basic: ₹30,000 minus ₹6,000, which gives ₹24,000. Half of basic, since Bengaluru now qualifies for 50%: ₹30,000. The least of the three is ₹24,000, so the entire HRA is exempt. At a 31.2% marginal rate in the old regime, that saves ₹89,856 a year.
The Paperwork That Protects Your Claim
Keep rent receipts, and ideally a rent agreement, ready for your employer's proof cycle — getting the HRA paperwork right is what makes the claim stick if it is ever questioned. Your landlord's PAN becomes mandatory once annual rent crosses ₹1 lakh. If your monthly rent exceeds ₹50,000, you are required to deduct TDS at 2% under Section 194-IB. Rent paid to parents can be claimed if it is genuinely paid and transferred traceably, and they must declare it as their income.
A Few More Things Worth Knowing
The exemption is calculated period by period. A mid-year rent change, a city move or a salary revision splits the calculation, so claim per period rather than on annual averages. If your salary has no HRA component at all, Section 80GG allows a smaller rent deduction of up to ₹60,000 a year, also only in the old regime. And keep the bigger picture in mind: a fully exempt HRA is often the largest single old-regime deduction, so run the regime comparison with your actual exemption figure.