House Rent Allowance is one of the most valuable tax breaks for salaried renters, and one of the least understood. HRA isn't simply "tax-free": the exempt part comes from a three-way comparison that payroll runs quietly in the background. Here's exactly how it works, what changed in 2026, and how to claim every rupee you're entitled to.
Who can claim HRA exemption
You can claim it if all of these are true:
- You're a salaried employee and HRA is part of your salary.
- You actually pay rent for the home you live in.
- You're filing under the old tax regime. The new regime, which is the default, doesn't allow HRA exemption at all.
- You don't live in a house you own in the same city. Owning a house somewhere else is fine.
The rule sat in section 10(13A) of the Income Tax Act, 1961. From tax year 2026-27 it's section 11 of the Income-tax Act, 2025, with the details in the Income-tax Rules, 2026. The formula itself hasn't changed.
Self-employed, or salaried without any HRA in your pay? There's a separate, smaller deduction for rent (formerly section 80GG), up to ₹5,000 a month under the old regime. See tricky HRA cases.
The three-way rule
The exempt part of your HRA is the lowest of:
- The actual HRA your employer pays you.
- The rent you actually pay, minus 10% of your salary.
- 50% of your salary if you live in one of the eight listed cities, or 40% anywhere else.
Whatever's left over after the exempt part is taxed with the rest of your salary. The rule is designed so that the exemption shrinks when your rent is small compared to your pay: someone paying very little rent can't exempt their whole HRA just because the employer called it HRA.
The comparison is done for the period you actually paid rent. If your rent, salary or city changes partway through the year, work it out separately for each stretch and add them up.
Which cities get the 50% limit
| Period | 50% of salary | 40% of salary |
|---|---|---|
| Up to FY 2025-26 (ended 31 March 2026) | Delhi, Mumbai, Kolkata, Chennai | Every other city |
| From tax year 2026-27 (1 April 2026) | Delhi, Mumbai, Kolkata, Chennai, Bengaluru, Hyderabad, Pune, Ahmedabad | Every other city |
Gurugram, Noida, Navi Mumbai and Thane aren't on the list, however expensive the rent. The city that counts is where you live and pay rent, not where your office is registered.
What counts as “salary” here
For HRA, "salary" doesn't mean your CTC or gross pay. It's basic salary plus dearness allowance (where DA counts towards retirement benefits), plus any commission paid as a fixed percentage of turnover. Special allowance, bonus, LTA and other allowances are left out. That's why the 10% and 40/50% figures are usually much smaller than people expect.
Worked examples
Example 1: how the 2026 city change helps a Hyderabad renter
Basic + DA: ₹40,000 a month. HRA received: ₹20,000. Rent paid: ₹25,000.
| Figure | FY 2025-26 (40%) | Tax year 2026-27 (50%) |
|---|---|---|
| Actual HRA | ₹20,000 | ₹20,000 |
| Rent − 10% of salary (₹25,000 − ₹4,000) | ₹21,000 | ₹21,000 |
| 40% / 50% of salary | ₹16,000 | ₹20,000 |
| Exempt each month (lowest) | ₹16,000 | ₹20,000 |
The whole ₹20,000 is now exempt instead of ₹16,000: ₹48,000 a year less taxable income. In the 30% slab that's ₹14,976 less tax a year, including 4% cess; in the 20% slab, ₹9,984.
Example 2: when rent is low, the city doesn't matter
Basic + DA ₹60,000, HRA ₹30,000, rent ₹12,000 in Jaipur. The three figures are ₹30,000, ₹6,000 (₹12,000 − ₹6,000) and ₹24,000 (40%). Only ₹6,000 a month is exempt, because the rent condition is the lowest. Even in a 50% city it would still be ₹6,000. Whenever your rent is less than half of your basic + DA, the rent test comes out lower than the city limit wherever you live, so the city makes no difference.
The proof you need
- Rent receipts for each month claimed. Employers can skip them only when rent is ₹3,000 a month or less. Cash receipts above ₹5,000 need a ₹1 revenue stamp signed across by the landlord.
- Landlord's PAN if the rent for the year is more than ₹1 lakh (about ₹8,334 a month). If the landlord genuinely has no PAN, a signed declaration from them with their name and address is accepted instead.
- The declaration form to your employer: Form 124 from tax year 2026-27, which replaces Form 12BB. It now also asks about your relationship with the landlord.
- A rent agreement and bank records. They're not always demanded, but they're the best backup if the tax department ever questions the claim, especially when paying rent to a relative.
Mistakes that cost people money
Staying on the new regime without checking
The new regime is applied by default. It has lower rates but no HRA exemption, so for someone with high rent plus other deductions the old regime can still win. Compare both with your actual HRA before deciding: old vs new tax regime.
Using last year's city list
If you live in Bengaluru, Hyderabad, Pune or Ahmedabad, make sure your employer's payroll uses 50% from April 2026. If it doesn't, you can still claim the correct amount in your return.
Missing the proof deadline
Employers ask for proofs around January to February. Miss it and they'll deduct more tax in the last months of the year. The money isn't lost: claim the exemption in your income tax return and the extra TDS comes back as a refund.
Rent receipts that don't match reality
Receipts for rent you didn't pay, or a higher amount than you paid, are a common reason for tax notices. The tax department can match your claim against your landlord's PAN and their declared income. Claim what you actually pay, and pay it through a bank if you can.
Forgetting part-year changes
If you moved cities, changed your rent, or got a raise midway through the year, work out the exemption separately for each period. One annual calculation can give the wrong answer.
Paying rent to your parents, living with a spouse, renting a PG bed, or dealing with a landlord who won't share a PAN? Those cases are covered in tricky HRA cases.
Frequently asked questions
Can I claim HRA under the new tax regime?
No. HRA exemption is available only under the old tax regime. Under the new regime, which is the default, your entire HRA is taxable, although the new regime has lower tax rates and a ₹75,000 standard deduction. Compare both before choosing.
Which cities get the 50% HRA limit?
From tax year 2026-27 (starting 1 April 2026), eight cities: Delhi, Mumbai, Kolkata, Chennai, Bengaluru, Hyderabad, Pune and Ahmedabad. Up to FY 2025-26, only Delhi, Mumbai, Kolkata and Chennai qualified. Every other city uses 40%.
How is HRA exemption calculated?
It is the lowest of three amounts: the HRA you actually receive, the rent you pay minus 10% of your salary, and 50% of salary in the eight listed cities or 40% elsewhere. Salary here means basic pay plus dearness allowance, plus any commission paid as a fixed percentage of turnover.
Is the landlord’s PAN mandatory for HRA?
Yes, if the rent you pay in the year is more than ₹1 lakh. If your landlord does not have a PAN, a signed declaration from the landlord with their name and address is accepted instead.
Do I need rent receipts if my rent is low?
Employers generally do not need rent receipts when rent is ₹3,000 a month or less. Above that, keep a receipt for every month you claim. Bank transfer records and a rent agreement are good additional proof.
My employer did not give me the HRA exemption. Can I still claim it?
Yes. If you are on the old regime and missed the proof deadline, or your employer did not account for it, claim the exemption in your income tax return. Any extra tax deducted is refunded after the return is processed.
Can I claim HRA if I own a house?
Yes, if the house you own is in a different city from the one where you live and pay rent, or you do not live in it. You cannot claim HRA for rent while living in a house you own in the same city.
Can I pay rent in cash and still claim HRA?
Yes, cash rent is allowed, but it is weaker proof. A cash receipt above ₹5,000 needs a ₹1 revenue stamp signed by the landlord. Bank transfer or UPI gives a clear record and is safer if the claim is ever questioned.
What is Form 124?
From tax year 2026-27, Form 124 replaces Form 12BB as the statement you give your employer to claim HRA, LTA, home loan interest and other deductions. It also asks about your relationship with the landlord.