HRA Exemption: How to Calculate It and Maximise Your Tax Saving
HRA is one of the most misunderstood salary components. Millions of salaried Indians claim less than they're entitled to. Here's the exact formula and how to maximise it.
House Rent Allowance (HRA) is a component of your salary that can be partially or fully exempt from tax - but only under the old tax regime. If you pay rent and are on the old regime, this is one of the biggest tax-saving levers available to you. Many employees claim far less than they are entitled to simply because they do not know the formula.
The Three-Part HRA Formula#
The exempt amount is the lowest of these three values - and you must calculate all three every time:
- Actual HRA received from employer
- Rent paid minus 10% of basic salary
- 50% of basic salary (if you live in Delhi, Mumbai, Chennai, or Kolkata) or 40% for other cities
Example: Basic ₹50,000/month, HRA ₹20,000/month, rent ₹18,000/month in Mumbai. (1) ₹20,000. (2) ₹18,000 − ₹5,000 = ₹13,000. (3) 50% of ₹50,000 = ₹25,000. Exempt = lowest = ₹13,000/month.
What Counts as Basic Salary?#
For HRA calculation, 'basic salary' means your basic pay plus dearness allowance (DA). It does not include HRA itself, medical allowance, transport allowance, or performance bonus - a common source of error when employees calculate manually.
Documents You Need#
Your employer will ask for these to process HRA exemption via Form 12BB:
- Rent receipts for every month (or quarterly receipts if rent is consistent)
- Landlord's PAN number if annual rent exceeds ₹1 lakh (mandatory)
- Rent agreement (not mandatory but recommended for amounts above ₹5,000/month)
- If landlord does not have PAN: get a declaration signed by the landlord
Tax department tip: Cash rent payments above ₹5,000/month should have a ₹1 revenue stamp on receipts. Digital/bank transfers are cleaner and easier to prove.
Paying Rent to Parents - Is It Allowed?#
Yes, you can pay rent to your parents and claim HRA, provided the arrangement is genuine. Your parents must own the house, the rent must be actually paid (bank transfer), and your parents must declare this rental income in their ITR. This strategy works well if your parents are in a lower tax bracket - effectively shifting income from your 30% bracket to their 0% or 5% bracket.
HRA and Home Loan Together#
If you own a house but live in a rented house in another city (common for transfers), you can claim both HRA exemption and home loan interest deduction simultaneously. However, if you own a house in the same city you are renting in, the HRA claim becomes difficult to justify - the tax officer may question why you are renting when you own a property nearby.
Calculators Used in This Article
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