HRA Exemption: How to Calculate and Maximise It

For salaried employees living in rented accommodation, HRA exemption can save tens of thousands in taxes each year. However, the calculation involves three competing limits — and the least of the three wins.

Who Can Claim HRA?

• You must be a salaried employee receiving HRA as part of your salary structure.
• You must actually be living in a rented house.
• HRA is only available under the Old Regime. New Regime taxpayers cannot claim this exemption.
• If you own a house in the same city but rent another, you generally cannot claim both HRA and home loan benefits simultaneously.

The Three-Limit Formula

The exempt HRA is the minimum of these three amounts:

1. Actual HRA received from your employer
2. Rent paid minus 10% of Basic Salary (annual)
3. 50% of Basic Salary if you live in a metro city (Mumbai, Delhi, Kolkata, Chennai), or 40% of Basic Salary for non-metros

Worked Example

Suppose you live in Delhi (metro) and your salary structure is:

• Basic Salary: ₹5,00,000 per year
• HRA Received: ₹2,40,000 per year
• Rent Paid: ₹2,00,000 per year

Calculation:

• Limit 1: Actual HRA = ₹2,40,000
• Limit 2: Rent – 10% of Basic = ₹2,00,000 – ₹50,000 = ₹1,50,000
• Limit 3: 50% of Basic (metro) = ₹2,50,000
• HRA Exemption = ₹1,50,000 (the minimum)

The remaining ₹90,000 (₹2,40,000 – ₹1,50,000) is added to taxable salary.

Tips to Maximise HRA Exemption

• Pay rent to parents: If you live with your parents, you can pay them rent and claim HRA. Your parents must declare this as income. This works well if their tax rate is lower than yours.
• Negotiate a higher basic salary structure: A higher basic means limits 2 and 3 move in your favour.
• Keep rent receipts: You need receipts for rent above ₹1 lakh per year. If annual rent exceeds ₹1 lakh, you also need the landlord's PAN.
• Prefer metro classification: If you live in a metro, the 50% factor gives you more room than the 40% for non-metros.

HRA Without Salary (80GG)

If you are self-employed or your employer doesn't pay HRA, you can claim rent deduction under Section 80GG — but only under the Old Regime. The limit is the least of: rent paid minus 10% of total income, 25% of total income, or ₹5,000 per month. You must file Form 10BA to claim this.

New Regime Users: No HRA

If you opt for the New Regime, you cannot claim HRA exemption at all. If rent makes up a large part of your expenses and your employer pays significant HRA, this could tip the balance in favour of the Old Regime. Use our Income Tax Calculator to compare both regimes with your actual HRA figures.