House Rent Allowance (HRA) – Meaning, Calculation, Tax Exemption Rules

HRA Meaning

HRA, or House Rent Allowance, is a part of an employee’s salary provided towards expenses related to rented accommodation only. HRA is deducted from taxable salary under section 10(13A), an exemption that is now only available if you opt for the Old Tax Regime. Under the default New Tax Regime, HRA is fully taxable.

HRA varies from city to city. It also varies depending on the cost of living in that particular city. HRA is calculated and deducted from taxable income based on the city of residence and a few other factors. However, with the Code on Wages now in effect, the definition of ‘Basic Salary’ has changed for many, impacting how this exemption is calculated.

HRA Calculation – 2026 Update

Under the new laws regarding salaries, two major regulatory shifts have shifted the way you should plan your HRA tax exemption. Here is what you need to know regarding the update.

The “Default” Tax Regime (FY 2025-26)

The New Tax Regime is now the default setting for all employees. Under this default regime, HRA is fully taxable, which means 0% exemption.

 To claim the HRA exemption, you must explicitly opt out of the default regime and choose the Old Tax Regime with your employer at the start of the financial year.

The Impact of Updates on Wages

With the new Labour Codes officially notified, companies are now legally required to structure “Basic Pay” as at least 50% of an employee’s total Cost to Company (CTC).

Previously, companies kept Basic Salary low to maximize allowances. Now, the Basic Salary is likely going to be much higher. Since the HRA exemption formula subtracts “10% of Basic Salary” from your rent paid, a higher Basic Salary means a larger amount is subtracted. As a result, the new 50% rule slightly reduces the amount of HRA you can claim as tax-exempt compared to the old salary structures.

Check your March 2026 payslip. If your “Basic Pay” has jumped to 50% of your total pay, you are compliant with the new laws, but you may need to recalculate your tax liability.

HRA Calculation Formula – How to Calculate HRA?

While salary structures have changed, the mathematical formula for HRA exemption (under Section 10(13A) and Rule 2A) remains pretty much the same. The taxable portion of your HRA is the amount received minus the exempt amount. The Exempt HRA is the lowest of the following three values:

• Actual HRA Received – The exact amount your employer provides as HRA.
• Rent Paid in Excess of 10% of Salary: (Total yearly rent you paid) – (10% of your Basic Salary + DA)
• City-Specific Limit:
  • 50% of Salary: If you live in a Metro city.
  • 40% of Salary: If you live in any other city.

Note: For this formula, “Salary” is defined strictly as Basic Pay + Dearness Allowance (DA) + Commission (if paid as a fixed percentage of turnover).

HRA Calculation with Example

HRA calculation involves determining the amount exempt from income tax. The amount of tax deduction that can be claimed over HRA is the lowest of the following:

1. Actual rent paid minus 10% of salary
2. HRA received from employer 
3. City-specific limit
   • 50% of basic salary for those living in metro cities like Mumbai, Delhi, Kolkata, Chennai, Bengaluru, Hyderabad, Pune, and Ahmedabad
   • 40% of basic salary for those not in metro cities

Let’s take the example of an employee living in Delhi.

• Monthly basic salary: Rs 50,000
• Dearness Allowance: Rs 10,000
• Monthly rent paid: Rs 15,000
• Monthly HRA received: Rs 12,000

Calculating the tax-exempt HRA:

1. Actual rent paid minus 10% of salary: 15000-5000 = 10,000
2. HRA from employer: 12,000
3. City specific limit: 30,000 (50% of basic salary + dearness allowance)

The amount of tax deduction that can be claimed is the least of the above numbers, which is the actual rent paid minus 10% of salary.

In this example, the employee will receive HRA exemption of Rs 10,000 of his total taxable income.

Since the Rs 10,000 of HRA is exempt from tax, it essentially lowers the amount of income the government taxes the employee on. This translates to a lower tax liability for the employee.

Who Can Claim Tax Deduction on HRA?

HRA can be claimed as tax deduction if an employee meets the following criteria:

• Employee is a salaried individual
• Employee should receive HRA as a salary component
• Employee should live in a rented house
• Rent receipts should be issued in the employee’s name
• Employee must explicitly opt for the Old Tax Regime.
• The New Tax Regime is the default for FY 2026-27 and does not allow HRA exemption.

Factors Affecting HRA Calculation

• Salary: Basic salary for HRA is now defined as ‘Wages’ under the Code on Wages, 2019. It includes Basic Pay + Dearness Allowance (DA) + Retaining Allowance. If your total allowances exceed 50% of your CTC, the excess amount is added back to your Basic Salary for this calculation.
• HRA received: The actual amount of HRA received by the employee
• Actual rent paid: The amount of rent paid by the employee for his residence
• City of residence: The city in which the employee resides, which depends on whether the city is a metropolitan city or a non-metropolitan city. This classification now includes Bengaluru, Hyderabad, Pune, and Ahmedabad as metro cities eligible for the 50% slab

Section 80GG – How to Save Tax If you Don’t Receive HRA

After reading this article, you must have understood what a house rent allowance is and how you can claim an exemption to reduce your overall tax liability. But calculating HRA individually for each employee can be very time-consuming and tiring. 

What if we told you that you could automate it for all your employees?

RazorpayX Payroll automates the process of HRA calculation and saves your precious time. It automatically divides the employee CTC into separate components in just one click, in compliance with the Code on Wages, 2019. All you have to do is input the CTC and watch everything get done by the software. It also automatically handles the New vs. Old Regime selection for your employees ensuring a smooth process without any disruptions!

Other features of RazorpayX Payroll include:

• CTC Calculation & salary preview tool
• Automatic generation of HR letters
• Automatic compliance calculation & filings such as PF, PT, TDS & ESIC
• Automated salary calculation and disbursement into bank accounts

FAQs

How is HRA calculated in salary?

HRA is typically set by employers as 40% to 50% of your Basic Salary, depending on your city’s metro status. Under the 2026 Code on Wages compliance, Basic Pay should be 50% of your total CTC, which means the HRA is calculated to fit within the remaining allowance pool. It is a fixed part of your monthly gross earnings, regardless of whether you actually pay rent or claim a tax exemption.

How is the HRA exemption calculated?

HRA exemption is calculated based on Section 10(13A) rules, available only if you opt for the Old Tax Regime. The exemption is the lowest of three values: actual HRA received, rent paid minus 10% of salary, or 50% of salary for metro cities and 40% for others.

What is the maximum HRA limit?

There is no fixed maximum monetary limit for HRA exemption. The limit is determined by the lowest of your actual HRA, rent paid over 10% of salary, or 50% or 40% of your Basic Salary, depending on where you are based. However, this exemption is strictly for the Old Tax Regime. Under the default New Tax Regime for 2026, the entire HRA amount is fully taxable.

How to calculate HRA?

To calculate your HRA exemption, first ensure you have opted for the Old Tax Regime. Compare three figures: the actual HRA received, your total annual rent minus 10% of your Basic Salary plus DA, and 50% or 40% of that salary, depending on where you live. The lowest of these three amounts is tax-exempt, while the remaining balance is added to your taxable income.

What is the HRA calculation formula in Excel?

You can determine the exempt amount using the MIN function. Assuming Cell A1 is Basic Salary plus DA, A2 is HRA Received, and A3 is Annual Rent, use the formula =MIN(A2, A3-(0.1*A1), 0.5*A1) for metro cities. For non-metros, change 0.5 to 0.4.

Can I claim HRA by paying rent to parents?

Yes, you can claim HRA for rent paid to parents. However, newregulations require stricter compliance, including a formal declaration of relationship and digital payment trails. You cannot be a co-owner of the property, and your parents must explicitly report this rental income in their own tax returns to avoid scrutiny from the tax department.