HRA exemption calculation for 2026-27: the three-way test, metro rule and rent receipts

The HRA exemption for a salaried employee who pays rent is the lowest of three amounts: (1) the HRA actually received, (2) rent paid minus 10% of salary, and (3) 50% of salary if you live in a metro city, or 40% elsewhere. Here "salary" means basic pay plus dearness allowance (where it counts for retirement benefits) plus any commission fixed as a percentage of turnover. The exemption is available only in the old regime. In the new regime the whole HRA is taxable. For an illustrative employee with ₹7.5 lakh basic and ₹3 lakh HRA paying ₹25,000 a month in Pune, the exemption is ₹2,25,000, which saves up to ₹70,200 at the 30% slab.

The three-way test

Limb	Formula	What it means
A	HRA actually received for the period you rented	You cannot exempt more than you were paid
B	Rent paid − 10% of salary for the same period	Low rent gives little or no exemption
C	50% of salary (metro) or 40% (other cities)	Caps the exemption for high-rent cases

The exemption is the smallest of A, B and C, worked out for the months you actually paid rent. If you moved house or changed salary during the year, calculate period by period.

Metro cities. Under the 1961 rules the 50% limit applied to Delhi, Mumbai, Kolkata and Chennai. The Income-tax Rules, 2026 (notified in March 2026, in force from 1 April 2026) are reported to extend it to eight cities: Delhi, Mumbai, Kolkata, Chennai, Bengaluru, Hyderabad, Pune and Ahmedabad. Confirm the list your employer's payroll applies. If your city is not on the list, use 40%.

Worked example 1: non-metro city

Basic ₹62,500 a month (₹7,50,000 a year), no DA. HRA ₹25,000 a month (₹3,00,000). Rent in Pune ₹25,000 a month (₹3,00,000).

A: HRA received = ₹3,00,000
B: ₹3,00,000 − 10% of ₹7,50,000 = ₹3,00,000 − ₹75,000 = ₹2,25,000
C: 40% of ₹7,50,000 = ₹3,00,000

Exemption = ₹2,25,000. Taxable HRA = ₹75,000. From tax year 2026-27 Pune is reported to be on the 50% list, so C becomes ₹3,75,000, but the answer is still ₹2,25,000 because B is lowest.

Worked example 2: Mumbai, high rent

Basic ₹1,00,000 a month (₹12,00,000). HRA ₹50,000 a month (₹6,00,000). Rent ₹70,000 a month (₹8,40,000).

A: ₹6,00,000
B: ₹8,40,000 − ₹1,20,000 = ₹7,20,000
C: 50% of ₹12,00,000 = ₹6,00,000

Exemption = ₹6,00,000, so all of the HRA is exempt. At 31.2% that is ₹1,87,200 of tax saved. This is the kind of profile where the old regime can beat the new. Run it through the old vs new regime comparison.

Worked example 3: renting for part of the year

Basic ₹50,000 a month. HRA ₹20,000 a month. You lived with family from April to September and rented at ₹18,000 a month from October to March (6 months).

A: HRA for the 6 rented months = ₹1,20,000
B: ₹1,08,000 − 10% of ₹3,00,000 = ₹78,000
C: 40% of ₹3,00,000 = ₹1,20,000

Exemption = ₹78,000. HRA for April to September (₹1,20,000) is fully taxable.

Paying rent to parents or a spouse

Parents: allowed if the parent genuinely owns the house and receives the rent. The parent must show the rent as income in their own return. Pay by bank transfer, not cash, and keep a rent agreement.
Spouse: generally not accepted, because a shared household makes the arrangement look artificial.
Your own house: no exemption if you live in a house you own in the same city. If your own house is in another city, you can claim HRA where you work and, in the old regime, interest on that house within limits.

Documents and landlord PAN

Rent receipts or bank statements showing rent payments for each month.
Rent agreement, ideally registered or on stamp paper as your state requires.
Landlord's PAN if the annual rent exceeds ₹1 lakh. Employers ask for it, and the department matches it with the landlord's return.
If you pay rent of more than ₹50,000 a month and are not under audit, you must deduct 2% TDS on the rent.

Submit these to your employer when asked for proofs, usually between January and March. If you miss the employer deadline, you can still claim the exemption in your own return by filing by the due date in the old regime.

No HRA? The rent deduction

If your salary has no HRA component, or you are self-employed, the old regime allows a deduction for rent paid under section 134 (formerly 80GG). It is the least of ₹5,000 a month, 25% of total income, or rent minus 10% of total income, provided neither you nor your spouse or minor child owns a house where you live. A declaration is required. It is much smaller than a typical HRA exemption.

Common errors

Using gross salary instead of basic plus DA. This inflates limbs B and C.
Claiming HRA for months you did not pay rent.
Fake receipts. The department compares claimed rent with landlords' returns and the AIS. See the common mistakes guide.
Forgetting that HRA is fully taxable in the new regime.

For a combined calculation, see the take-home salary guide and the worked examples. Use the old regime calculator with your exemption added to the deductions box.

Renters who also have a home loan should read the home loan interest guide, and the full list of old-regime claims is in the deductions guide.

Frequently asked questions

Can I claim HRA and home loan interest together?

Yes, in the old regime, if you live in rented accommodation in one city and own a house elsewhere, or if your own house is not available to you for genuine reasons. Keep records showing why.

Is DA always included in salary for HRA?

Only DA that forms part of salary for retirement benefits under your terms of employment.

Can I claim HRA if I pay rent in cash?

The law does not forbid cash rent, but bank payments are far easier to prove. Cash rent receipts above ₹1 lakh a year without a landlord PAN invite questions.

Sources

Income Tax Department: exempt salary allowances under the Income-tax Act, 2025 and the Income-tax Rules
Income Tax e-filing portal: return forms showing HRA and rent deduction fields