HRA Exemption: How It's Calculated (FY 2026-27)

House Rent Allowance is a component of salary, and part of it can be exempt from tax — but only under the old tax regime, and only if you actually pay rent. The exemption is the least of three amounts, which means one weak leg caps the whole benefit. Understanding which leg binds you is the difference between structuring it well and quietly losing money.

The least-of-three rule

Your exempt HRA is the smallest of:

1. Actual HRA received from your employer for the year;
2. Rent paid minus 10% of salary (salary = basic pay + dearness allowance that forms part of salary);
3. 50% of salary if you live in a metro city, 40% otherwise.

Whatever HRA remains above the exempt amount is taxed as ordinary salary income.

The metro list changed for FY 2026-27

From FY 2026-27, eight cities qualify for the 50% limit: Delhi, Mumbai, Kolkata, Chennai, Bengaluru, Hyderabad, Pune, and Ahmedabad. This is a long-overdue fix — Bengaluru rents at Mumbai levels were capped at the 40% non-metro limit for decades. Note the timing carefully: for FY 2025-26 income (returns filed in 2026), the old four-city list still applies; the expanded list applies to income earned from April 2026 onward.

Worked example

Basic salary ₹6,00,000, no DA; HRA received ₹3,00,000; rent paid ₹2,40,000 (₹20,000/month) in a metro city:

1. Actual HRA: ₹3,00,000
2. Rent − 10% of salary: ₹2,40,000 − ₹60,000 = ₹1,80,000
3. 50% of salary: ₹3,00,000

The least is ₹1,80,000 exempt; the remaining ₹1,20,000 of HRA is taxable. Leg 2 binds here — as it does for most people — which yields the practical insight: every extra rupee of rent adds a rupee of exemption (until another leg binds), while a higher basic salary cuts the exemption through the 10% subtraction.

Open this example in the HRA calculator — all three legs are shown side by side, so you can raise the rent or the basic and see which one takes over as the binding leg.

Rules that trip people up

• New regime = no HRA exemption. If you're on the default new regime, HRA is fully taxable. A large exemption (high rent in a metro) is one of the few things that can still tip the scales toward the old regime — run it before choosing; see old vs new regime choice.
• Landlord's PAN is required if annual rent exceeds ₹1,00,000, and rent above ₹50,000/month requires you to deduct TDS. No rent receipts or agreement = an exemption that dies in scrutiny.
• Paying rent to parents is legal — if it's real: actual bank transfers, a rent agreement, and the parent declaring the rent as income. Paper-only arrangements are a classic notice-trigger.
• You own a house? You can still claim HRA for a rented home in your city of work while claiming home-loan benefits on a property elsewhere — genuinely occupying the rented home is the test.
• No HRA component in your salary? The HRA exemption doesn't apply at all — the (much smaller) Section 80GG deduction is the fallback for rent payers without HRA.

Run your numbers

The HRA Exemption Calculator applies the least-of-three rule to your exact salary structure and shows which leg binds you — then feed the result into the Income Tax Calculator and the regime comparison to see whether the exemption changes your regime decision. This is general education, not personalized tax advice.