Tax / 7 min read
HRA Exemption Explained: How to Maximise Tax Savings on Rent
How the HRA exemption is calculated, the three-way test that limits it, the metro rule, and the documents you need to claim it safely.
By Analyze Daily Team · Published 6 June 2026 · Updated 15 July 2026
Key takeaways
- HRA exemption is the lowest of three prescribed amounts, not automatically the HRA received.
- Only Delhi, Mumbai, Kolkata and Chennai use the 50% salary limb; other locations use 40%.
- HRA exemption is available under the old regime, not the new regime.
- The claim must reflect genuine rent and supportable documents.
What HRA exemption really is
If you receive House Rent Allowance as part of your salary and actually pay rent, part of that allowance can be exempt from tax. But the exempt portion is rarely the full HRA shown on your payslip.
The amount is decided by a three-way test, and your exemption is always the smallest of the three figures, which is what trips up most first-time filers.
The three-way test
Your exemption is the least of: the actual HRA received, the rent you pay minus 10% of your salary, and 50% of salary if you live in a metro or 40% if you do not. Here salary means basic pay plus dearness allowance, not your gross.
Because it is the minimum of the three, paying very low rent or receiving a very high HRA usually means a large chunk of the allowance stays taxable. Genuine rent that reflects reality raises the exemption.
The metro rule and the new regime
Only Delhi, Mumbai, Kolkata and Chennai count as metros for the 50% limit. Every other city, including Bengaluru, Hyderabad and Pune, uses 40%, which surprises many people in those hubs.
Crucially, HRA exemption exists only under the old tax regime. If you opt for the new regime, the entire allowance is taxable, so factor this in when choosing between the two.
Claim it safely
Keep rent receipts and a rent agreement, and report your landlord's PAN to your employer if your annual rent crosses 1,00,000. Tax authorities can and do ask for proof.
If you pay rent to a parent or family member, the arrangement must be genuine with money actually changing hands. A paper-only claim is exactly what gets disallowed during scrutiny.
Before you decide
Your practical checklist
- Use basic salary plus eligible dearness allowance for the calculation rather than gross salary.
- Keep the rent agreement, payment evidence and rent receipts consistent with the claim.
- Provide landlord information requested by payroll and retain it for return filing.
- Compare the total tax under both regimes; a larger HRA exemption does not by itself prove the old regime wins.
Sources and review
How this guide was prepared
Material rules and regulated assumptions are checked against primary or first-party references. The page was last reviewed on 15 July 2026. If a rule or figure has changed, please report it through our corrections process.
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