HRA Exemption Explained: How to Maximise Tax Savings on Rent

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.

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.

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.

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.