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HRA Exemption: How to Calculate It (With the New 2026 City List)
Quick Work Studio · 2026-10-27
If your salary includes House Rent Allowance (HRA) and you live in a rented home, part of that allowance can be tax-free. How much depends on a three-part formula, and from tax year 2026-27 more cities count as metros, so many people in Bengaluru, Hyderabad, Pune and Ahmedabad now save more.
The formula: the smallest of three amounts
- The HRA you actually receive in the year.
- The rent you pay minus 10% of your salary.
- 50% of your salary if you live in one of the eight listed cities, or 40% anywhere else.
Here "salary" means basic pay plus dearness allowance (DA), and commission if it is a fixed percentage of sales. It doesn't include other allowances or bonuses. The tax-free part is whichever of the three is smallest; the rest of your HRA is taxed like normal salary.
The eight 50% cities
| City | Tax year 2025-26 | From tax year 2026-27 |
|---|---|---|
| Delhi, Mumbai, Kolkata, Chennai | 50% | 50% |
| Bengaluru, Hyderabad, Pune, Ahmedabad | 40% | 50% |
| Every other city | 40% | 40% |
The change comes from the Income-tax Rules, 2026, which apply from 1 April 2026.
Worked example
Ravi lives in Bengaluru. His basic pay is ₹50,000 a month (₹6 lakh a year), his HRA is ₹25,000 a month (₹3 lakh a year) and he pays rent of ₹28,000 a month (₹3.36 lakh a year).
| 2025-26 (40%) | 2026-27 (50%) | |
|---|---|---|
| 1. HRA received | ₹3,00,000 | ₹3,00,000 |
| 2. Rent − 10% of salary | ₹2,76,000 | ₹2,76,000 |
| 3. % of salary | ₹2,40,000 | ₹3,00,000 |
| Tax-free HRA | ₹2,40,000 | ₹2,76,000 |
The new city rule makes ₹36,000 more of his HRA tax-free. In the 30% slab, that's a saving of about ₹11,200 a year including cess.
Ways to raise your tax-free HRA
- Look at which limit decides it. If limit 2 is the smallest, paying higher rent raises it; if limit 1 is the smallest, only a higher HRA from your employer helps.
- Rent to parents, properly. You can pay rent to your parents if they own the house, but it must really be paid (bank transfer is best), and they must show it as income in their return. Rent paid to a spouse isn't accepted.
- Count the whole year. If you moved cities or your rent changed, the formula is worked out month by month.
Documents you need
- Rent receipts or a rent agreement.
- Your landlord's PAN if the rent is more than ₹1 lakh a year (about ₹8,334 a month).
- Bank statements showing the rent payments help if the tax department asks.
Give these to your employer when they ask for investment proofs, usually in January to March, so less tax is cut from your salary. If you miss it, you can still claim HRA when you file your return.
Who can't claim HRA exemption
- People who choose the new tax regime: HRA is fully taxable there. Compare both regimes before deciding (see New vs Old Tax Regime).
- People who live in their own house and pay no rent.
- Self-employed people and employees without HRA in their salary. They may be able to claim a smaller rent deduction under a separate rule instead.
Try it: the HRA Calculator shows all three limits, which one decides your tax-free HRA, and the difference between tax years 2025-26 and 2026-27. Then check your total tax with the Income Tax Calculator.