Your tax-free HRA is the smallest of three amounts. These are the HRA you actually received, the rent you paid minus 10% of your salary, and 50% of salary in a metro city (40% elsewhere). Here "salary" means basic pay plus DA, not your gross or CTC. The exemption is available only in the old tax regime.
From tax year 2026-27, eight cities count as metros instead of four. That alone can raise the exemption for people in Bengaluru, Hyderabad, Pune and Ahmedabad. The examples below show exactly how, and you can check your own figures in our HRA calculator.
Tools used in this guide
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The least-of-three rule
For the year (or each stretch of months with the same rent), work out:
- Actual HRA received from your employer.
- Rent paid − 10% of salary.
- 50% of salary if you live in a metro city, otherwise 40%.
The smallest of these is exempt. Whatever HRA is left over is added to your taxable salary.
"Salary" for this rule is basic pay plus dearness allowance that counts for retirement benefits. If you earn commission fixed as a percentage of turnover, that's included too. Special allowance, bonus and HRA itself are not.
Note: Tax year 2026-27 runs from 1 April 2026 to 31 March 2027. It's what used to be called FY 2026-27 / AY 2027-28, renamed by the Income-tax Act, 2025.
Metro cities for HRA from tax year 2026-27
The Income-tax Rules, 2026 widened the list of cities that get the 50% limit.
| City | Tax year 2026-27 | FY 2025-26 and earlier |
|---|---|---|
| Delhi | 50% | 50% |
| Mumbai | 50% | 50% |
| Kolkata | 50% | 50% |
| Chennai | 50% | 50% |
| Bengaluru | 50% | 40% |
| Hyderabad | 50% | 40% |
| Pune | 50% | 40% |
| Ahmedabad | 50% | 40% |
| Every other city | 40% | 40% |
Neighbouring cities don't inherit metro status. Gurugram, Noida, Thane and other satellite towns stay at 40%.
Warning: The 50% limit only matters when it's the smallest of the three tests. If your rent is modest, the rent test usually decides the answer and the city makes no difference.
Worked examples: non-metro and Bengaluru
Example 1: a non-metro city
Priya works in Jaipur. Her basic is ₹40,000 a month, HRA ₹16,000 and rent ₹15,000, for all 12 months.
| Test | Calculation | Amount for the year |
|---|---|---|
| Actual HRA | ₹16,000 × 12 | ₹1,92,000 |
| Rent − 10% of salary | ₹1,80,000 − ₹48,000 | ₹1,32,000 |
| 40% of salary | 40% × ₹4,80,000 | ₹1,92,000 |
Exempt HRA: ₹1,32,000. The remaining ₹60,000 of HRA is taxable. The rent test is the binding one, so Priya would get more exemption only by paying more rent, up to ₹20,000 a month. Beyond that the other two tests cap it at ₹1,92,000.
Example 2: Bengaluru, 40% vs 50%
Arjun lives in Bengaluru. Basic ₹60,000 a month, HRA ₹30,000, rent ₹35,000.
| Test | Tax year 2026-27 | FY 2025-26 |
|---|---|---|
| Actual HRA | ₹3,60,000 | ₹3,60,000 |
| Rent − 10% of salary (₹4,20,000 − ₹72,000) | ₹3,48,000 | ₹3,48,000 |
| City limit | 50% × ₹7,20,000 = ₹3,60,000 | 40% × ₹7,20,000 = ₹2,88,000 |
| Exempt HRA | ₹3,48,000 | ₹2,88,000 |
The new metro list adds ₹60,000 to Arjun's exemption. In the 30% slab, with 4% cess, that's ₹18,720 less tax for the year in the old regime.
The full ₹3,48,000 exemption is worth even more. At the 30% slab plus cess, it cuts Arjun's tax by ₹1,08,576 a year compared with having all his HRA taxed. That's why HRA weighs so heavily in the choice of regime.
Now compare a Bengaluru colleague on a basic of ₹50,000, HRA ₹20,000 and rent ₹18,000. Her rent test gives ₹1,56,000 under both years' rules, because it's smaller than either the 40% or the 50% limit. The change doesn't help her at all.
Tip: Our HRA calculator has a switch between tax year 2026-27 and FY 2025-26 rules. For the four newly added cities it shows how much the new list adds.
Rent changed or you rented for part of the year
Rent paid for only some months
You can claim the exemption only for months in which you paid rent. Say Priya, from example 1, moved into a rented flat in August and paid rent for 8 months.
| Test (8 months) | Amount |
|---|---|
| Actual HRA (₹16,000 × 8) | ₹1,28,000 |
| Rent − 10% of salary (₹1,20,000 − ₹32,000) | ₹88,000 |
| 40% of salary (40% × ₹3,20,000) | ₹1,28,000 |
Exempt HRA: ₹88,000. She still received HRA for all 12 months (₹1,92,000), so ₹1,04,000 of it is taxable.
Rent went up during the year
Work out each stretch separately and add them up. A Hyderabad employee with basic ₹50,000 and HRA ₹20,000 pays ₹18,000 rent for six months, then ₹22,000:
- First six months: rent test = ₹1,08,000 − ₹30,000 = ₹78,000 (smaller than the HRA of ₹1,20,000 and the city limit of ₹1,50,000)
- Next six months: rent test = ₹1,32,000 − ₹30,000 = ₹1,02,000
- Total exempt: ₹1,80,000, taxable HRA ₹60,000
The same approach works if your basic or HRA changes mid-year after an appraisal.
Rent receipts, landlord PAN and proof
Your employer gives the exemption through lower TDS, but only with proof. Keep these ready:
- Rent receipts for each month (or quarter), showing the amount, period, address and the landlord's name and signature.
- A rent agreement. It isn't always asked for, but it backs up the receipts.
- Landlord's PAN when your rent is more than ₹1,00,000 a year, which is ₹8,334 a month or more. Without it, your employer may not allow the full exemption.
- Bank records. Paying rent by bank transfer leaves a clear trail if questions come up later.
If you miss your employer's proof deadline, TDS will be higher. You can still claim the correct exemption when you file your own return, as long as you have the documents.
HRA in the new regime
The new regime gives no HRA exemption. Every rupee of HRA is taxed as part of your salary. In exchange you get lower slabs, a ₹75,000 standard deduction and a tax-free limit of ₹12.75 lakh for salary income.
So a big HRA exemption is often the main reason to stay in the old regime. Arjun's ₹3,48,000 is a large deduction on its own, but whether it's enough depends on his salary and his other deductions. Put your HRA figure into the old vs new regime calculator to see which regime comes out lower. It can also work out the HRA for you from basic, HRA and rent.
If you're still deciding on an offer, the HRA percentage in your salary structure matters only in the old regime. The salary in-hand calculator shows how basic and HRA split your gross pay.
No HRA in your salary but you pay rent?
Self-employed people, and employees whose pay has no HRA component, can't use the least-of-three rule. The old regime has a separate rent deduction for them (section 80GG under the old Act).
It's the smallest of three limits. One is a fixed monthly cap, reported as ₹5,000 a month. The others are 25% of total income, and rent paid minus 10% of total income. It has its own conditions and isn't available in the new regime. Confirm the current limit and your eligibility with a CA before claiming it.
Common HRA mistakes
- Using gross salary or CTC instead of basic + DA. This inflates both the 10% deduction and the city limit, and gives the wrong answer.
- Assuming any big city is a metro. Only the eight cities above get 50%.
- Paying more rent for a bigger exemption. Once rent exceeds the city limit (or HRA) plus 10% of basic, extra rent adds nothing. For Arjun that point is ₹36,000 a month.
- Claiming HRA after choosing the new regime. It won't count, and your employer will tax the full amount.
- Forgetting the landlord's PAN on rent above ₹1 lakh a year.
Note: Rules can change. Confirm with Form 16, your employer or a CA before filing.