What is HRA & how to Calculate HRA Exemption in India

What is HRA and How to Calculate HRA Exemption in India?

Learn what HRA is, how HRA exemption is calculated, and its tax impact under the old vs the new regime (FY 2025–26)

Written by : Knowledge Centre Team

2026-01-10

1175 Views

12 minutes read

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HRA (House Rent Allowance) is likely 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. It is governed by Section 10(13A) of the Income-tax Act, 1961, as per Rule 2A. However, the exemption is available only if you opt for the old tax regime and meet the prescribed conditions.

Thus, it’s always better to understand this important component of your total salary, and how you can maximise your benefit from it.

Key Takeaways

  • HRA (House Rent Allowance) is a salary component that can be partially tax-exempt under the old tax regime

  • HRA exemption is calculated as the lowest of three amounts: HRA received, rent minus 10% of salary, or 40%/50% of salary (metro vs non-metro)

  • “Salary” for HRA calculation includes basic pay, DA (if retirement-linked) and turnover-based commission

  • HRA exemption is not available under the new tax regime (Section 115BAC)

  • HRA exemption should be recalculated monthly if salary or rent changes during the year

What is HRA in a Salary Slip?

HRA is a salary component that can be partially exempt from tax under the old tax regime, helping you save tax. The employers include this allowance in your salary package to cover the cost of rented accommodation and allow you to also avail the associated tax benefit.

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 is the default, 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 the HRA exemption if you opt for the old tax regime.

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How Tax Saving Works on House Rent Allowance?

The House Rent Allowance is partially exempt, subject to certain criteria. The first and most crucial factor is that you must pay rent. If you do not stay in a rented accommodation, you cannot claim the HRA exemption. The entire allowance will form part of your gross taxable income, in this case.

Factors That Determine HRA Exemption Calculation:

Taxability or tax-exemption of HRA as per Rule 2A depends on the following factors:

  • City of residence: metro or non-metro

  • HRA Received

  • Rent Paid

  • Income for HRA

What Constitutes Salary for HRA Calculation?

You should note that “income” for HRA exemption is generally defined as the Basic Salary plus Dearness Allowance (DA) and, in some cases, commission. It is different from CTC (Cost to Company) or monthly in-hand income.

The income for HRA calculations will consist of the following:

  • 50%  / 40% of Basic salary

  • Part of the Dearness Allowance (DA), if it forms part of retirement benefits

  • Variable Commission linked to turnover, attributed to your performance (fixed commission is not considered)

tax-tips-for-senior-citizens

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 ₹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 the income for the HRA calculation

  • Still, no variable commission and fixed commission do 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.

How to Calculate HRA in Salary?

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 that may require you to recalculate your exemption, they are less significant. For example, a change of employment from a metro city to a non-metro city.

Thus, there would be the 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 additional extrapolations of these events, but in most cases, the above conditions are relevant for recalculation.

The HRA is exempt to the extent of the minimum of the following three numbers:

  • Total HRA received during a financial year

  • 50% of salary (Basic pay + DA + commission (40% in case of non-metro cities)

  • Rent paid minus 10% of Basic Salary and DA

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 ₹30,000 per month throughout the FY 2025-26.

You can claim ₹2.94 lakhs as an exemption out of the ₹3.12 lakhs of HRA received in the year. ₹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 ₹2.94 Lakhs in this scenario.

Note: If you are residing in a non-metro city, the estimate of 50% in point D will change to 40% of income for the HRA estimate.

trivia-img

Did You Know?

The government has proposed extending the 50% HRA exemption under the old regime, offering relief to renters in Bengaluru, Hyderabad, Pune and Ahmedabad


Source: ET

Cut Tax Stress 46,800

HRA Exemption in Scenario 2: Unchanged Income & Rent Changes:

Again, assuming the uniform salary throughout the financial year as per Image 1. However, your rent payment will change from ₹30,000 per month. to ₹ 35,000 per month from Aug 2025.

So, within the first four months of FY 2025-26, you end up paying ₹120,000 as rent, while in the last eight months (Aug 2025 – March 2026), you pay a total rent of ₹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 ₹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 ₹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 ₹69,200 for HRA calculation. What 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 the salary structure, your taxable HRA amount increases from ₹18,000 to ₹46,000.

Your taxable income reduces by ₹3.38 Lakhs in this scenario.

So, you can see that 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 throughout the year, you will need to recalculate HRA at the end of the financial year.

How the 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 for either the old tax regime or the new tax regime. However, note that the new tax regime is the default, and the House Rent Allowance (HRA) exemption is not provided under it.

Under the new tax regime, common exemptions and deductions such as HRA, Section 80C investments, Section 80D (health insurance), and interest on housing loans (for self-occupied property) are not available. The structure is designed to simplify tax filing by reducing compliance and documentation requirements, but it may not suit taxpayers who actively claim multiple deductions.

Making an Informed Choice:

In order to choose the more advantageous tax regime, consider the following:

  • 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.

Conclusion

Understanding HRA is not just about spotting an allowance on your salary slip; it is about knowing how to optimise it correctly. HRA can significantly reduce your tax liability, but only if you understand how the calculation works. Since the exemption depends on basic pay, DA, rent paid, and city of residence, even minor changes to the salary structure can affect your HRA calculation.

Before choosing between the old and new tax regimes, carefully evaluate your numbers. A clear understanding of basic pay, DA and HRA calculation in your salary will help you claim the right exemption and optimise your overall tax outgo.

Glossary

  1. House Rent Allowance: Salary component paid by the employer to help cover the cost of rented accommodation
  2. Old Tax Regime: Tax system allowing exemptions and deductions like HRA, 80C and 80D
  3. New Tax Regime: Default tax regime without most exemptions and deductions
  4. Dearness Allowance: Salary component to offset inflation; partly included for HRA calculation if retirement-linked
  5. Metro City: Cities such as Delhi, Mumbai, Kolkata and Chennai, where 50% salary is considered for HRA exemption
glossary-img
Uncertain About Insurance

FAQs

The HRA full form in salary is House Rent Allowance. It is a component of a salaried employee’s pay structure provided by the employer to help cover rental accommodation expenses.

HRA is usually shown under the earnings or allowances section of your salary slip, along with components such as basic pay and other allowances. It appears as a separate line item titled “House Rent Allowance.” In simple terms, the amount your employer provides to meet your rental accommodation expenses is what HRA means in salary. If you live in a rented house and opt for the old tax regime, a portion of this amount may be exempt from tax, subject to prescribed conditions.

In most salary structures, HRA is fixed as a percentage of your basic pay. The HRA percentage of basic salary in India typically ranges from 40% to 50%, depending on the employer’s compensation policy and the city of posting.

  • 50% of basic salary is allocated as HRA for employees living in metro cities (Delhi, Mumbai, Kolkata, Chennai, Bengaluru, Hyderabad, Pune and Ahmedabad)

  • 40% of the basic salary is common for non-metro cities

House Rent Allowance (HRA) is typically a fixed percentage of your basic pay, typically 40%-50%. However, the amount eligible for tax exemption varies depending on your salary components, rent paid and whether you reside in a metro or non-metro city, and is determined annually based on valid rent proofs.

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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