Calculate your HRA exemption for FY 2026-27 with the three-limb formula, examples, documents and a quick comparison against the new tax regime.
House Rent Allowance (HRA) remains one of the most valuable salary-linked deductions for Indian employees who still opt for the old tax regime. In FY 2026-27, with the new tax regime as the default and the old regime as an opt-in, understanding HRA exemption calculation is essential to decide which regime saves you more tax.
What is HRA and Who Can Claim It
HRA is an allowance paid by employers to help employees cover the cost of rented accommodation. It is taxable as part of salary, but Section 10(13A) of the Income Tax Act allows partial or full exemption if the employee actually pays rent for residential accommodation that is not owned by them.
Only salaried individuals who receive HRA as part of their CTC and who actively pay rent can claim this exemption. Self-employed individuals cannot claim HRA; instead, they may use Section 80GG, subject to its own conditions and limits.
The Three-Limb HRA Formula
HRA exemption under Section 10(13A) is the least of these three amounts, computed monthly and aggregated over the period during which HRA and rent both apply.
- Actual HRA received from the employer
- Rent paid minus 10% of basic salary plus dearness allowance
- 50% of basic + DA for metro cities (Delhi, Mumbai, Kolkata, Chennai) or 40% of basic + DA for non-metro cities
Worked Example for FY 2026-27
Consider a salaried employee in Mumbai with monthly basic plus DA of ₹60,000, HRA of ₹25,000 and rent paid of ₹22,000 per month. Annual figures: basic + DA ₹7,20,000, HRA received ₹3,00,000, rent paid ₹2,64,000.
- Actual HRA received: ₹3,00,000
- Rent paid minus 10% of basic + DA: ₹2,64,000 − ₹72,000 = ₹1,92,000
- 50% of basic + DA (metro): ₹3,60,000
The exempt HRA is the lowest of the three — ₹1,92,000. The balance ₹1,08,000 is added back to taxable salary under the old regime.
Documents to Keep Ready
- Monthly rent receipts with revenue stamp where required
- Rental agreement with the landlord
- Landlord's PAN if annual rent exceeds ₹1 lakh
- Bank statements showing rent transfers
- Salary slips and Form 16 showing HRA component
HRA vs the New Tax Regime
The new tax regime, default from FY 2026-27, does not allow HRA exemption. However, it offers a higher basic exemption of ₹3 lakh, standard deduction of ₹75,000 for salaried taxpayers and a Section 87A rebate up to ₹7 lakh taxable income. Employees paying significant rent in metros often still find the old regime, with HRA, more beneficial — but a side-by-side calculation each year is essential before choosing.
Old vs New Regime Decision Framework
For a salaried taxpayer paying significant rent, the old regime with HRA, Section 80C, 80D and home-loan interest often still beats the new regime. The break-even tends to fall where total annual deductions plus HRA exemption exceed ₹3 lakh to ₹4 lakh, depending on income bracket.
Run a side-by-side calculation each April with realistic numbers for HRA, rent, 80C and 80D before submitting your investment declaration to your employer. Locking in the wrong regime can mean paying significantly higher TDS for the entire year, with refunds taking months to come back.
Common HRA Mistakes That Trigger Scrutiny
Common mistakes that attract scrutiny include claiming HRA without actually paying rent, paying rent in cash without proper receipts, submitting rent receipts from relatives without underlying ownership or genuine payment, and forgetting to report landlord PAN where annual rent exceeds ₹1 lakh.
The Income Tax Department now cross-checks HRA claims with AIS, TDS on rent (Section 194-IB or 194-I), and bank statements. Keep a clean digital trail of monthly rent transfers through bank or UPI, rent agreements, and landlord PAN to make any future inquiry a non-event.
Rent Receipts, Payments and Audit Trail
A clean audit trail for HRA starts with paying rent through a traceable banking channel each month, on or before the due date, into the landlord's bank account. Cash payments, even with stamped receipts, are increasingly scrutinised by the Income Tax Department, especially for high-rent claims in metros.
Stitch the proof together each month — rent transferred from your bank, a numbered receipt from the landlord, and an underlying registered rent agreement. This three-document chain is hard to dispute and protects the exemption decisively if your return is selected for scrutiny.
Conclusion
HRA exemption can meaningfully reduce your tax outgo if you are salaried, paying rent and choosing the old regime. Compute the three limbs every year, maintain clean documentation and run a quick old-vs-new comparison before locking your regime choice. A few minutes with the formula can translate into thousands of rupees retained in your hand.
