HRA exemption rules explained

Most people know they get "some" tax exemption on HRA if they pay rent. Far fewer know that the exemption is capped by whichever of three numbers happens to be smallest — which means simply receiving a large HRA component doesn't guarantee a large exemption.

The three numbers

• The actual HRA you receive.
• 50% of Basic+DA if you live in a metro city (Delhi, Mumbai, Kolkata, Chennai), or 40% elsewhere.
• Rent you actually pay, minus 10% of Basic+DA.

Your exemption is the smallest of those three — not the average, not the first one, the smallest. Everything above that gets added back to your taxable salary.

Where people get caught out

The third figure is the one that surprises people most. If your rent is low relative to your Basic salary — a common situation for anyone sharing a flat or living somewhere cheaper than their salary would suggest — that "rent minus 10%" number can end up smaller than either of the other two, capping your exemption well below your actual HRA.

Only available on the old regime

None of this applies if you're on the new tax regime — HRA exemption, like most old-regime deductions, simply isn't available there. The new regime's larger standard deduction is meant to compensate, but whether it actually does depends on your rent and salary structure, which is exactly what a regime comparison is for.

Paying rent to a parent

This is legitimate if done properly: a real rent agreement, rent paid via bank transfer (not cash), and your parent declaring it as rental income on their own return. Tax authorities do scrutinize these claims, and an arrangement with no paper trail is the most common reason one gets rejected.

See all three numbers for your own situation on the HRA exemption calculator.