HRA exemption: how much of your house rent allowance is tax-free
Updated 11 October 2026
If you receive house rent allowance (HRA) and pay rent, part of your HRA is tax-free under the old tax regime. The exempt amount is the lowest of three figures: the HRA you actually received, rent paid minus 10% of salary, and 50% of salary in a metro city (40% elsewhere). From tax year 2026-27 the 50% rate applies in eight cities instead of four. HRA exemption is not available in the new tax regime.
The HRA formula
The exemption is the least of:
- The actual HRA received from your employer in the year.
- Rent paid minus 10% of salary.
- 50% of salary if you live in one of the specified metro cities, or 40% of salary anywhere else.
Here "salary" means basic pay plus DA (where DA counts for retirement benefits) plus any commission fixed as a percentage of turnover. It does not include HRA itself, bonus or other allowances. For central government employees, basic pay plus the full DA counts.
Whatever HRA is left after the exemption is added to your taxable salary.
The new 8-city rule from tax year 2026-27
For many years, only four cities qualified for the 50% limit: Delhi, Mumbai, Kolkata and Chennai. Everyone else, including people paying high rents in Bengaluru or Pune, was held to 40%.
The Income-tax Rules, 2026 (Rule 279), notified by the CBDT in March 2026 under the new Income-tax Act, 2025, expanded the list. From tax year 2026-27 (1 April 2026 to 31 March 2027), the 50% limit applies in eight cities:
| Tax year | Cities where 50% applies |
|---|---|
| Up to 2025-26 (returns filed in 2026) | Delhi, Mumbai, Kolkata, Chennai |
| 2026-27 onwards | Delhi, Mumbai, Kolkata, Chennai, Bengaluru, Hyderabad, Pune, Ahmedabad |
This matters only when the third limb is the lowest of the three, which happens when your rent and HRA are both high compared with your basic pay. Note that the return you file in 2026 for the year 2025-26 still uses the old four-city rule.
The tax city list is not the same as the X, Y and Z classes used to pay HRA to government employees. Those decide how much HRA you get (30%, 20% or 10% of basic pay); the tax rule decides how much of it is exempt. See HRA city classification for the pay side.
Worked example
1. Actual HRA = ₹3,00,000.
2. Rent minus 10% of salary = ₹3,60,000 − ₹60,000 = ₹3,00,000.
3. 50% of salary (Pune, from 2026-27) = ₹3,00,000. Under the old 40% rule it would be ₹2,40,000.
Exempt HRA for 2026-27 = ₹3,00,000, so all her HRA is tax-free. Under the old rule it would have been ₹2,40,000, leaving ₹60,000 taxable. In the 30% slab, the change saves her ₹18,000 plus ₹720 cess, so ₹18,720 a year.
Try your own numbers in the HRA exemption calculator.
Conditions and paperwork
- You must actually pay rent and live in the rented house. If you own a house in the same city and live in it, there is no HRA exemption.
- Rent receipts or a rent agreement are needed for your employer. Paying by bank transfer creates a clean record.
- Landlord's PAN is required if annual rent is more than ₹1,00,000.
- Rent to parents is allowed if it is genuine: you actually pay, ideally by bank transfer, and your parent shows it as rental income. Rent to a spouse is generally not accepted.
- Only for the months you pay rent. If you move cities mid-year, work out each period separately using that city's percentage.
Declare your rent to your employer through the investment declaration (the old Form 12BB) so that less tax is deducted each month. If you forget, you can claim the exemption when you file your return.
If you do not get HRA, or chose the new regime
The new regime does not allow HRA exemption, so all HRA is taxable there. Even so, the new regime may still be cheaper overall; compare with the income tax calculator or read old vs new regime.
If you pay rent but your salary has no HRA component, the old regime has a separate deduction (the old section 80GG, now section 134 of the 2025 Act), generally limited to ₹5,000 a month and subject to other conditions. Self-employed people can also use it.