HRA Exemption in India: New Rules & Rates (2026)

HRA Exemption in India: New Rules, Rates & Calculation (2026)

House Rent Allowance, or HRA, is one of the most valuable and most misunderstood components of a salaried employee's pay packet in India. For payroll teams and HR managers, it is also one of the trickiest to get right. The HRA exemption directly reduces the tax an employee pays, which means a small error in how you calculate or document it can trigger a higher tax deduction at source, an unhappy employee, or a compliance query during assessment.

The rules around HRA exemption have shifted meaningfully heading into the 2026-27 financial year. New disclosure requirements now ask employees to declare more about their rental arrangements, the list of cities that qualify for the higher exemption rate has expanded, and the broader move toward the new tax regime has changed who actually benefits from HRA at all. If your declaration forms, payroll logic, and proof-collection process were built a few years ago, they almost certainly need a refresh.

This guide explains HRA exemption from the ground up: what it is, how the exemption is calculated, the documentation you must collect, the recent rule changes, and the practical mistakes that cost employers and employees money. It is written for HR and payroll professionals, founders running lean teams, and finance staff who process salaries in India. Wherever specific rates or limits are mentioned, treat them as a working reference and confirm the current figures on the official Income Tax Department portal before you finalise payroll, because thresholds and notified rules do change.

What is House Rent Allowance (HRA)?

House Rent Allowance is a salary component that employers pay to help employees meet the cost of renting accommodation. It is paid as part of monthly salary and appears as a separate line on the salary slip. Crucially, HRA is partially exempt from income tax under Section 10(13A) of the Income Tax Act, provided the employee actually pays rent and meets the other conditions.

The key word is partially. HRA is not fully tax-free. The exemption is capped by a formula, and any HRA you receive above the exempt amount is added to taxable salary. An employee who receives generous HRA but lives rent-free with family, for example, gets no exemption at all and pays tax on the entire HRA.

For employers, HRA matters for two reasons. First, it affects how much tax you deduct at source (TDS) each month, because the exempt portion is removed before computing taxable income. Second, it is governed by documentation rules that put the onus on you to collect and retain proof. If you grant an exemption without adequate evidence, the shortfall can come back to you during scrutiny.

Who can claim the HRA exemption?

A few conditions must all be satisfied before an employee is entitled to the HRA exemption:

The employee must be a salaried individual who receives HRA as a component of salary. Self-employed people and those who do not receive HRA cannot claim under Section 10(13A), though they may have a separate, more limited route under Section 80GG.

The employee must actually pay rent for residential accommodation that they occupy. Rent paid for a house the employee owns and lives in does not count, and rent must be genuinely paid, not merely shown on paper.

The accommodation must not be owned by the employee. If an employee owns the home they live in, there is no HRA exemption, although they may instead claim home loan interest and principal benefits where applicable.

One nuance that surprises many people: an employee can pay rent to a parent or relative and still claim HRA, provided the arrangement is genuine, the rent is actually transferred, and the recipient declares that rental income in their own return. Paying token rent to a family member purely to manufacture an exemption is exactly the kind of arrangement tax authorities scrutinise, so the transaction must be real.

How the HRA exemption is calculated

The exempt amount of HRA is the lowest of these three figures:

1. The actual HRA received from the employer during the year.
2. Rent paid in excess of 10% of salary (that is, actual rent minus 10% of salary).
3. 50% of salary if the employee lives in a metro city, or 40% of salary if they live in a non-metro city.

For this calculation, "salary" means basic salary plus dearness allowance (if it forms part of retirement benefits) plus any commission based on a fixed percentage of turnover. For most private-sector employees, salary here is effectively basic pay plus DA.

Because the exemption is the lowest of the three, the binding constraint is usually either the actual rent paid or the metro/non-metro percentage. An employee who pays very little rent will be limited by the second figure; an employee who pays high rent in a metro will often be limited by the 50% figure or by the actual HRA received.

A worked example

Consider an employee in Mumbai with the following annual figures: basic salary of Rs 6,00,000, HRA received of Rs 3,00,000, and rent paid of Rs 2,40,000.

• Actual HRA received: Rs 3,00,000.
• Rent paid minus 10% of salary: Rs 2,40,000 minus Rs 60,000 = Rs 1,80,000.
• 50% of salary (metro): Rs 3,00,000.

The lowest of these three is Rs 1,80,000. So the exempt HRA is Rs 1,80,000, and the remaining Rs 1,20,000 of HRA is added to taxable salary.

A non-metro example

Now take an employee in a smaller city with basic salary of Rs 4,80,000, HRA received of Rs 1,92,000, and rent paid of Rs 1,80,000.

• Actual HRA received: Rs 1,92,000.
• Rent paid minus 10% of salary: Rs 1,80,000 minus Rs 48,000 = Rs 1,32,000.
• 40% of salary (non-metro): Rs 1,92,000.

The lowest is Rs 1,32,000, which is the exempt amount. The rest of the HRA is taxable.

These examples show why two employees with identical salaries can end up with very different exemptions depending on the rent they pay and the city they live in. It also shows why the calculation must be done per employee and revisited if their rent or location changes mid-year.

The big change: which cities count as "metro"

For a long time, only four cities were treated as metros for the 50% HRA rate: Mumbai, Delhi, Kolkata, and Chennai. Everywhere else qualified for the lower 40% rate. This was a frequent source of frustration because high-cost cities such as Bengaluru, Hyderabad, and Pune were treated the same as far smaller towns.

A significant update for the 2026-27 cycle has widened the list of cities eligible for the higher 50% exemption to include several major non-metro hubs. Employees living in cities such as Bengaluru, Hyderabad, Pune, and Ahmedabad may now qualify for the 50% rate rather than 40%, which changes the exemption ceiling and therefore the monthly TDS for affected employees.

For payroll teams this is not a trivial footnote. If your payroll system still hard-codes only the four classic metros at 50% and everything else at 40%, employees in the newly added cities will have too little exemption applied and too much tax deducted. You should review the official notification for the exact, current list of qualifying cities and update your payroll configuration and declaration forms accordingly. Because the precise list can be revised, confirm it against the latest government notification rather than relying on a static table.

New HRA disclosure requirements

The other major shift is around documentation. New disclosure rules now require employees to provide more detail when claiming HRA exemption, including declaring their relationship with the landlord. The intent is to curb fabricated rent arrangements, particularly those involving family members, and to make it easier for authorities to verify genuine claims.

In practice, this means HR and payroll teams should update their HRA declaration forms to capture, at minimum, the landlord's name, the rented property address, the rent amount, the rental period, and whether the landlord is a relative of the employee. Where rent paid in a year crosses the threshold that triggers the requirement, the landlord's PAN must also be collected. The widely used threshold has been rent of more than Rs 1,00,000 per year, above which the landlord's PAN is mandatory, but confirm the current figure before the financial year begins.

The practical takeaway is to collect fresh declarations before you process the first payroll of the new financial year, rather than carrying over last year's forms. Employees move houses, rents change, and the new disclosure fields will not have been captured on old forms.

Documentation employers must collect

Granting an HRA exemption without proper proof is a risk you carry, so build a clean documentation process. The core documents are:

A signed HRA declaration form for each employee claiming the exemption, capturing rent amount, address, period, landlord details, and the relationship to the landlord.

Rent receipts covering the period for which the exemption is claimed. Many employers collect these monthly or quarterly; collecting them at least once a quarter reduces the year-end scramble.

A rent agreement, especially where rent is substantial or where the landlord is a relative. While a rent agreement is not always strictly mandatory, it strengthens the genuineness of the claim.

The landlord's PAN where annual rent exceeds the prescribed threshold. If the landlord refuses to share a PAN, the employee is expected to obtain a declaration from the landlord, but this is a weaker position and should be flagged.

Proof of payment such as bank transfers. Rent paid in cash, particularly to relatives, is far harder to defend than rent paid through traceable bank transactions. Encourage employees to pay rent by bank transfer.

Retain these records for the period required under your retention policy and tax rules. A simple digital repository, ideally within your HRMS, where each employee's declaration and receipts are stored against their profile, makes audits and queries far less painful.

HRA and the new versus old tax regime

Perhaps the most important strategic point for 2026 is that HRA exemption is only available under the old tax regime. Under the new tax regime, which is now the default for most taxpayers, the HRA exemption under Section 10(13A) is not available.

This changes the conversation entirely. Many employees who pay significant rent in expensive cities may find that the old regime, with its HRA exemption and other deductions, still works out better for them. Others, particularly those with modest rent or who have shifted to the new regime for its lower headline rates and higher standard deduction, will get no benefit from HRA at all even though it appears on their salary slip.

For payroll teams, the implication is that you must collect each employee's regime choice at the start of the year and apply HRA exemption only for those on the old regime. Applying an HRA exemption to an employee who has opted for the new regime is a common and costly error that leads to under-deduction of tax. Your declaration process should ask employees to confirm their regime, and your payroll engine should branch accordingly.

It is also worth communicating this clearly to employees. Many assume HRA is automatically tax-free regardless of regime, and are surprised at year-end when their tax does not reduce as expected. A short, plain-language note during the investment declaration window saves a great deal of confusion later.

Common mistakes and how to avoid them

Several recurring errors trip up both employers and employees:

Applying HRA exemption under the new regime. As above, this is the single most common mistake now that the new regime is the default. Always branch on regime choice.

Using the wrong city classification. With the metro list expanding, applying 40% where 50% now applies (or vice versa) is easy. Keep your city-to-rate mapping current and tied to the latest notification.

Granting exemption without proof. Accepting a declaration with no rent receipts, no landlord PAN where required, and no bank trail leaves you exposed. Build proof collection into the year, not just year-end.

Ignoring mid-year changes. Employees relocate, switch from living with family to renting, or move cities. Each change can alter the exemption. Allow employees to update declarations during the year and recompute TDS accordingly.

Token rent to relatives without substance. Rent paid to parents can be legitimate, but only if the money genuinely moves, the recipient declares the income, and the arrangement is real. Cash "rent" to a relative with no bank trail is a weak claim.

Confusing salary definitions. Remember that "salary" for the HRA formula is basic plus DA (and qualifying commission), not gross CTC. Using gross salary inflates the 10% and percentage figures and produces the wrong exemption.

How HRA interacts with the 50% basic wage rule

A connected development worth flagging is the move, under the wage code framework, toward basic pay (including DA) making up at least 50% of total remuneration. As employers restructure salaries to comply, basic pay rises, which in turn raises the "salary" figure used in the HRA formula.

A higher basic increases both the 10%-of-salary deduction and the 50%/40% ceiling. The net effect on any individual's exemption depends on their rent, but in general a higher basic raises the ceiling for the metro/non-metro limb of the calculation. Payroll teams restructuring CTC to meet the basic wage rule should re-run HRA exemptions afterward, because the figures that fed last year's calculation will have moved.

HRA across cities: a comparison

To make the metro/non-metro difference concrete, consider an employee with basic salary plus DA of Rs 8,00,000 a year, annual HRA of Rs 4,00,000, and annual rent of Rs 3,00,000. The actual HRA received (Rs 4,00,000) and rent minus 10% of salary (Rs 3,00,000 minus Rs 80,000 = Rs 2,20,000) stay the same regardless of city. Only the third limb changes with location.

In a metro at 50%, the third figure is Rs 4,00,000. The lowest of the three is Rs 2,20,000, so the exemption is Rs 2,20,000. In a non-metro at 40%, the third figure is Rs 3,20,000. The lowest of the three is still Rs 2,20,000, so the exemption is the same. In this particular case the rent limb binds, so the city does not change the outcome.

Now raise the rent to Rs 4,20,000. Rent minus 10% of salary becomes Rs 3,40,000. In a metro, the limbs are Rs 4,00,000, Rs 3,40,000, and Rs 4,00,000, so the exemption is Rs 3,40,000. In a non-metro, the limbs are Rs 4,00,000, Rs 3,40,000, and Rs 3,20,000, so the exemption is Rs 3,20,000. Here the city classification costs the employee Rs 20,000 of exemption. This is precisely why the expanded metro list matters so much for employees in high-rent cities that were previously stuck at 40%, and why payroll teams must apply the correct rate.

The lesson for payroll is that the binding limb shifts depending on the relationship between rent and salary. You cannot assume the city rate always matters, nor that it never does. The formula must be run in full for each employee, every time, and a good payroll system does this automatically rather than relying on a manual lookup.

Section 80GG: HRA's lesser-known cousin

Not every employee receives HRA. Some employers fold the entire pay into a consolidated salary, and many self-employed people pay rent without any HRA component at all. For these individuals, Section 80GG provides a separate, more limited route to a deduction for rent paid, but only under the old tax regime.

The deduction under Section 80GG is the lowest of three figures: Rs 5,000 per month, 25% of total income, or rent paid in excess of 10% of total income. There are additional conditions: the taxpayer (or their spouse or minor child) must not own residential accommodation at the place where they work, and the taxpayer must file the prescribed declaration form.

For HR teams, Section 80GG mainly comes up when an employee asks why they cannot claim HRA. The honest answer is that if HRA is not part of their salary, they cannot claim under Section 10(13A), but they may be able to claim under Section 80GG when they file their return. Section 80GG is claimed by the individual directly and is not something the employer typically processes through payroll, but understanding it helps you answer employee questions accurately.

Can you claim HRA and a home loan at the same time?

This is one of the most frequent employee questions, and the answer is often yes, contrary to popular belief. An employee can claim both HRA exemption and home loan benefits simultaneously in genuine situations, for example where they own a house in one city (and pay a home loan on it) but live in rented accommodation in another city for work.

It can even apply within the same city in legitimate circumstances, such as when the owned property is too far from the workplace, is let out, or is genuinely not suitable for occupation. The key, as always, is genuineness. The arrangement must reflect a real situation, not a contrivance to claim two benefits on the same home the employee actually lives in.

Where an employee both owns and lives in a property, they cannot claim HRA, because the requirement to actually pay rent is not met. Payroll teams generally apply the HRA exemption based on the rent declaration and let the employee handle home loan interest and principal claims through their declaration and return; the two are assessed on their own facts.

Mid-year joiners, leavers, and city moves

HRA is rarely static across a full year. Employees join partway through the year, leave, switch cities, or move from living with family to renting. Each of these affects the exemption and therefore monthly TDS.

For a mid-year joiner, the exemption is computed only for the months they were employed and received HRA with you. You should collect their declaration and proof for that period, and they will reconcile any prior employment separately, ideally by submitting a consolidated statement of previous salary so you can deduct tax correctly.

For a city move, the metro/non-metro rate can change midstream. An employee who moves from a non-metro to a metro (or to a newly added 50% city) part-way through the year should update their declaration, and the exemption should be computed for each period at the applicable rate. Payroll systems that allow period-wise rent and city entries handle this gracefully; spreadsheets often do not.

For leavers, ensure the final HRA exemption is reflected in the full and final settlement and in the Form 16 you issue, so the employee's year-end position is accurate.

Monthly TDS mechanics

In practice, HRA exemption is not applied as a single year-end adjustment; it flows into monthly TDS. At the start of the year you estimate the employee's annual exempt HRA from their declaration, subtract it (and other exemptions and deductions, for old-regime employees) from gross salary to arrive at estimated taxable income, compute the annual tax, and divide it across the remaining months.

When the employee submits actual rent proofs during the proof-collection window, you reconcile the estimate against the evidence. If they declared more rent than they can prove, you reduce the exemption and the additional tax is spread across the remaining months. If they paid more than declared, you can increase the exemption. Doing this reconciliation in, say, the third quarter rather than the final month avoids a painful spike in tax in an employee's last paycheques of the year.

This is also where regime selection bites hardest. If an employee provisionally chose the old regime and claimed HRA but then switches to the new regime, the HRA exemption must be reversed and tax recomputed. Lock down regime choices as early as practical and communicate that late changes can cause a TDS adjustment.

A practical HRA process for HR and payroll teams

Pulling this together, here is a workflow that keeps HRA clean across the year:

At the start of the financial year, issue a fresh HRA declaration form that captures rent, address, period, landlord name and relationship, landlord PAN where applicable, and the employee's chosen tax regime. Do not roll over last year's forms.

Configure your payroll system with the current metro/non-metro city list and apply HRA exemption only to employees on the old regime. Validate the logic with a few test cases before the first payroll run.

Collect rent receipts at least quarterly and store them digitally against each employee. Remind employees ahead of deadlines rather than chasing after.

At the investment-proof submission window, reconcile declared rent against receipts and recompute the exemption for the full year, adjusting TDS for the remaining months so there is no large year-end shock.

Keep a clear audit trail. If a claim is ever queried, you want the declaration, receipts, agreement, PAN, and payment proof in one place.

Doing this well is not just a compliance exercise. It directly affects employees' take-home pay and their trust in the payroll team. Getting HRA right, every month, is one of the quiet ways an HR function earns credibility.

Frequently asked questions

Can I claim HRA exemption if I live in my own house? No. The HRA exemption requires that you actually pay rent for accommodation you occupy and do not own. If you live in a house you own, you cannot claim HRA exemption, though you may be able to claim home loan benefits instead.

Is HRA exemption available under the new tax regime? No. The HRA exemption under Section 10(13A) is available only under the old tax regime. If an employee has opted for the new regime, no HRA exemption applies even though HRA still appears on the salary slip. Payroll teams must confirm each employee's regime before applying the exemption.

Which cities qualify for the 50% HRA exemption rate? Historically only Mumbai, Delhi, Kolkata, and Chennai qualified for 50%, with all other cities at 40%. The qualifying list has been widened to include additional major hubs such as Bengaluru, Hyderabad, Pune, and Ahmedabad. Confirm the exact current list against the latest official notification before configuring payroll.

Do I need my landlord's PAN to claim HRA? If your annual rent exceeds the prescribed threshold (commonly Rs 1,00,000 per year), you must provide the landlord's PAN. Below that threshold, the PAN is generally not required, but rent receipts and a declaration are still expected. Verify the current threshold for the financial year.

Can I pay rent to my parents and claim HRA? Yes, provided the arrangement is genuine. The rent must actually be paid, ideally by bank transfer, the property must not be owned by you, and your parent must declare the rental income in their own tax return. Token or paper-only arrangements are not acceptable.

What if I pay rent but do not receive HRA from my employer? If you do not receive HRA as a salary component, you cannot claim under Section 10(13A). However, you may be able to claim a limited deduction for rent paid under Section 80GG, subject to its own conditions and lower limits.

How does a salary restructuring affect my HRA exemption? Because the HRA formula uses basic salary plus DA, any change to your basic pay changes the exemption. A higher basic, such as one resulting from compliance with the 50% basic wage rule, raises the percentage-based ceiling in the formula. Recompute the exemption after any restructuring.

How often should employees submit rent receipts? There is no single rule, but collecting receipts at least quarterly is good practice. It spreads the workload, reduces year-end errors, and ensures you have documentation throughout the year rather than a last-minute pile.

Conclusion

HRA exemption sits at the intersection of payroll accuracy, tax compliance, and employee trust. The fundamentals have not changed, but the details that matter most in 2026 have: the metro list is wider, disclosure requirements are stricter, the basic wage rule is reshaping salary structures, and the new tax regime quietly removes the exemption for the many employees who have opted into it. A declaration form and payroll configuration built a few years ago will not handle these correctly.

The fix is process. Refresh your declaration forms, branch your payroll logic on the tax regime, keep your city classification current, and collect proof through the year rather than at the end of it. Treat each change carefully and verify current rates and rules on the official portal before you finalise payroll.

If managing HRA declarations, rent-proof collection, regime-based TDS, and city-wise exemption rates across a growing team sounds like a lot to track in spreadsheets, it is. A modern HRMS that captures declarations digitally, applies the right exemption logic automatically, and stores proofs against each employee can take most of this burden off your team. If you would like to see how this works in practice, it may be worth taking CozyHR for a spin and letting payroll automation handle the heavy lifting while your team focuses on people.