HRA exemption — the three-rule formula and 5 mistakes that cost you

Quick frame: HRA (House Rent Allowance) exemption is one of the biggest line items for salaried Indians paying rent. The exemption is the least of three numbers: (a) actual HRA in your salary, (b) rent paid minus 10% of basic, (c) 50% of basic for metro / 40% non-metro. Get the math right, keep proof, and ensure landlord PAN if total annual rent exceeds ₹1 lakh.

The formula

HRA exemption = min(
  HRA received in salary,
  rent paid − 10% of basic,
  50% of basic (metro) / 40% (non-metro)
)

For a Mumbai-based employee with basic ₹50k, HRA ₹25k, paying ₹30k rent:

• (a) HRA received = ₹3,00,000
• (b) Rent − 10% basic = ₹3,60,000 − ₹60,000 = ₹3,00,000
• (c) 50% basic (Mumbai = metro) = ₹3,00,000

All three equal ₹3 lakh → fully exempt. Zero taxable HRA.

Use the HRA Calculator — it handles all three branches.

Which cities are "metro" for HRA?

Per Income Tax Rules: Mumbai, Delhi, Kolkata, Chennai only — these get the 50% benefit. Bengaluru, Hyderabad, Pune, Ahmedabad, Gurgaon, Noida — all 40%, despite being expensive metros. The list hasn't been updated since the 1990s. Bangalore tech professionals lose ~10% of HRA exemption to this artefact.

Top 5 mistakes that cost you HRA

1. No rent receipts kept

Employers ask for receipts in Jan-Feb. Keep them throughout the year. PAN of landlord required if annual rent > ₹1 lakh. Without receipt + PAN, employer disallows in Form 16 — you can't claim later either.

2. Self-paid rent to parents — no documentation

Yes, you can pay rent to parents and claim HRA. But:

• Sign a written rental agreement
• Pay via bank transfer (not cash)
• Get receipts monthly
• Parents must declare it as rental income in their ITR

Without these, the IT dept sees it as a sham. Notice + reassessment + penalty.

3. Paying without PAN above ₹1 lakh

If annual rent > ₹1 lakh, landlord PAN is mandatory. No exception. If landlord refuses to share PAN, get Form 60 declaration. Without either, employer caps your exemption.

4. Not deducting 5% TDS for > ₹50k/month rent

Section 194-IB: tenants paying > ₹50,000/month rent (individuals/HUFs not under audit) must deduct 5% TDS on annual rent. File Form 26QC by 30 Apr (FY end). Skip this and you're personally liable + late fee under section 234E (₹100/day).

Use the TDS on Rent (194-IB) Calculator.

5. Switching to new regime accidentally

The new tax regime (default since FY 2025-26) does not allow HRA exemption. If you're a high-rent payer in metro, old regime + HRA usually wins. Check both with the Income Tax Calculator before submitting Form 12BB.

Self-employed / no HRA — use 80GG

If you don't receive HRA from an employer (self-employed or salaried-with-no-HRA), you can still deduct rent under section 80GG. The deduction is the least of:

• ₹5,000 per month (₹60k/year)
• 25% of total income
• Rent − 10% of total income

Smaller cap than HRA, but it's something. Use the Section 80GG Calculator.

Common questions

Q. Can both spouses claim HRA on same rent? A. No — only one. Whoever pays must get the receipt. Splitting is allowed if both have separate rent contracts (one room each, etc.) — rare in practice.

Q. I work from home. Can I still claim HRA? A. Yes — HRA is exempt for the rent paid, regardless of work location. WFH doesn't affect eligibility.

Q. Living in PG / shared accommodation? A. Yes — landlord is the property owner (or main tenant in some cases). Get receipts in your name showing your share of rent.

Q. What if my employer doesn't give me HRA component? A. Negotiate. If they refuse, you can't claim HRA — but you can claim 80GG (smaller benefit, but legitimate).

Q. Rent receipts on Re. 1 stamp? A. For monthly rent > ₹5,000, yes — affix a Re. 1 revenue stamp on each receipt. Cheap insurance against scrutiny.