Written by : Knowledge Centre Team
2025-10-25
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12 minutes read
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HRA or House Rent Allowance is probably the second largest number on your salary slip and one of the most prominent allowances. If you are staying on rent HRA is an important tax-saving component for you.
Thus, it’s always better if you understand this important component of your total salary, and how you can maximise your benefit from it.
What is HRA?
HRA is one of the few allowances which are still partially exempt and can help you save tax. The employers include this allowance in your salary package to cover the cost of rented accommodation and to pass on the tax benefit related to it.
For the current Assessment Year (AY 2026–27), if you are not paying rent but receiving HRA, your entire allowance will be fully taxable. Additionally, under the new tax regime (Section 115BAC), which remains optional, HRA exemption is not allowed, even if you do pay rent. This regime offers concessional tax rates but requires you to forgo several exemptions and deductions, including HRA. You can still claim HRA exemption if you opt for the old tax regime.
How Tax Saving Works on House Rent Allowance?
House rent allowance is partially exempt depending on a few factors. The first and most crucial factor is, of course, you need to pay rent. If you do not stay on rent, you cannot claim the exemption on HRA. The entire allowance will form part of your gross taxable income, in this case.
Taxability or tax-exemption of HRA depends on the following factors:
- City of residence – metro or non-metro
- HRA Received
- Rent Paid
- Income for HRA
You should note that “income” for HRA is different from your CTC or in-hand income. The income for HRA calculations will consist of the following:
- Basic salary
- Part of the Dearness Allowance (DA), which is used for estimating your retirement benefits
- Variable Commission linked to turnover attributed to your performance (fixed commission is not considered)
Example of a Salary Slip with HRA
Thus, for example,
If your salary structure looks something like that given in Image 1, your monthly income for HRA calculation will be Rs. 49,000
- There is no DA
- The fixed commission does not form part of income for HRA estimates
If your salary structure looks like Image 2, your monthly income for HRA calculation will be Rs. 69,200
- 50% of DA will form part of income for HRA calculation
- Still, no variable commission and fixed commission does not form part of income for HRA
Revised Salary & Salary Structure after mid-year job switch.
Mark that, these HRA exemptions are applicable only if you opt for the old tax regime.
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Calculating Your HRA Exemption
HRA exemption under the old tax regime depends majorly on two factors and may change throughout the year based on these two:
- The rent you pay
- Your salary or salary structure
Any change in these two will warrant you to recalculate your HRA exemption. Although there are other factors too which may need you to recalculate your exemption, they are less prominent. For example, change of employment from a metro city to a non-metro city.
Thus, there would be following three major scenarios:
- Level income and rent payment throughout the financial year
- Level income but changed rent payment in the middle of the year
- Income changes in the middle of the financial year but rent remains the same
You can create more extrapolations of these events but for the majority of the cases, these will be relevant for recalculation.
The HRA is exempt to the extent of the minimum of the following three numbers:
- Total HRA Received in the FY
- 50% of Income for HRA Estimates; i.e. Basic + DA + Turnover based commission (40% in case of any other place than Delhi, Mumbai, Kolkata & Chennai)
- Rent Paid over 10% of Income for HRA purpose
HRA Exemption in Scenario 1 – Unchanged Income & Rent
Assuming your salary remains the same as given in Image 1, and you pay a rent of Rs. 30,000 per month throughout the FY 2025-26.
You can claim Rs. 2.94 lakhs as exemption out of the Rs. 3.12 lakhs of HRA received in the year. Rs. 18,000 will be the taxable HRA and will become part of gross taxable income.
Detailed calculation is given below:
B | Total Rent Paid | 3,60,000 |
C | Total HRA Received | 3,12,000 |
D | 50% of Basic + DA | 2,94,000 |
E | Rent Paid over 10% of Income (i.e. Basic + DA) | 3,01,200 |
F | Exempt HRA (Lowest of C, D & E) | 2,94,000 |
G | Taxable HRA to be Part of Gross Taxable Income (C - F) | 18,000 |
Your taxable income will reduce by Rs. 2.94 Lakhs in this scenario.
Note: If you are residing in a non-metro city, estimate of 50% in point D will change to 40% of income for HRA estimate.
HRA Exemption in Scenario 2 – Unchanged Income & Rent Changes
Again, assuming the uniform salary throughout the financial year as per Image 1. But this time your rent payment changes from Rs. 30,000 p.m. to Rs. 35,000 p.m. from Aug 2025.
So, within the first four months of FY 2025-26, you end up paying Rs. 120,000 as rent, while in the last eight months (Aug 2025 – March 2026) you pay a total rent of Rs. 280,000.
April - July | Aug – March | ||
A | Rent Paid | 1,20,000 | 2,80,000 |
B | HRA Received | 1,04,000 | 2,08,000 |
C | 50% of (Basic + DA) | 98,000 | 1,96,000 |
D | Rent Paid over 10% of Income (i.e. Basic + DA) | 1,00,400 | 2,40,800 |
E | Exempt HRA (Lowest of B, C & D) | 98,000 | 1,96,000 |
F | Taxable HRA to be Part of Gross Taxable | 6,000 | 12,000 |
Income | |||
Total Taxable HRA in AY 2026-27 | 18,000 |
In this scenario, the change in the rent payment failed to affect your HRA exemption. Thus, your taxable HRA remains the same. Can you spot the reason why?
Your taxable income reduces by Rs. 2.94 Lakhs in this scenario.
HRA Exemption in Scenario 3 – Income Changes & Rent Stays the Same
This time while you keep on paying the same Rs. 30,000 a month as rent, your income changes from the salary slip in Image 1 to Image 2 from August 2025.
Meaning, your net monthly income will be Rs. 69,200 for HRA calculation. Which is the sum of your new Basic Salary and 50% of the dearness allowance (DA).
Your HRA Exemption will play out as given below in this scenario:
B | Total Rent Paid | 3,60,000 |
C | Total HRA Received | 3,12,000 |
D | 50% of Basic + DA | 2,94,000 |
E | Rent Paid over 10% of Income (i.e. Basic + DA) | 3,01,200 |
F | Exempt HRA (Lowest of C, D & E) | 2,94,000 |
G | Taxable HRA to be Part of Gross Taxable Income (C - F) | 18,000 |
With the increase in salary coupled with the changes to salary structure increases your taxable HRA amount from Rs. 18,000 to Rs. 46,000.
Your taxable income reduces by Rs. 3.38 Lakhs in this scenario.
So, you can see HRA and rent payment can help reduce your taxable income to a great extent. However, you may have to recalculate your HRA exemption more than once even if your income stays the same if your salary includes turnover based commission.
Since you cannot predict the amount of commission income you will receive through the year, you will need to recalculate HRA at the end of the financial year.
How New Tax Regime Impacts Your HRA Exemption
With the launch of the new tax regime under Section 115BAC of the Income Tax Act, salaried taxpayers are now free to opt between the present (old) tax regime and the new, concessional tax regime. But it should be remembered that House Rent Allowance (HRA) exemption is not provided under the new regime.
This implies that if you choose the new tax regime, you cannot claim exemption of HRA, even if you reside in rented house accommodation and satisfy all other conditions. The old regime, however, still permits exemption of HRA as per the rules established.
Making an Informed Choice
In order to choose the more advantageous tax regime, follow these steps:
Whether HRA forms part of your salary structure
The amount of rent that you pay on an annual basis
The aggregate deductions that you usually claim (e.g., deductions under Section 80C, 80D, and HRA)
For most people, those who pay high rent and claim several deductions will find the previous regime better in terms of tax efficiency.
Disclaimer - This article is issued in the general public interest and meant for general information purposes only. The views expressed in this blog are solely those of the writer and do not necessarily reflect the official policy or position of Canara HSBC Life Insurance Company Limited or any affiliated entity. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the blog or the information, products, services, or related graphics contained in the blog for any purpose. Any reliance you place on such information is therefore strictly at your own risk. You should consult with a qualified professional regarding your specific circumstances before taking any action based on the content provided herein.
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