HRA Calculation and Exemption (2026): Formula, Metro vs Non-Metro and Examples

House rent allowance (HRA) is the single biggest tax saving for most salaried employees who live in rented homes — and the one that causes the most back-and-forth between employees and payroll every year. How much HRA is exempt? Does it work under the new regime? Can you pay rent to your parents? What if you moved cities halfway through the year? And what does the employer actually need to see before reducing TDS?

This guide explains HRA calculation and exemption for 2026 step by step: the three-part formula, metro vs non-metro, worked examples at different salaries, what happens when rent or salary changes during the year, the documents employers should collect, and the mistakes that lead to tax notices later.

General guidance as of 2 October 2026, not tax advice. The Income-tax Act, 2025 replaced the Income-tax Act, 1961 from 1 April 2026; the HRA exemption has carried over, but check the current rules and section references with your CA.

The short answer

• HRA exemption = the least of three amounts:
  1. HRA actually received from the employer;
  2. rent paid minus 10% of salary;
  3. 50% of salary in a metro city, or 40% elsewhere.
• "Salary" here means basic + DA (and commission based on a fixed percentage of turnover, if any) — not gross.
• Old regime only. Under the new tax regime, HRA is fully taxable.
• You must actually pay rent for a home you live in. No rent, no exemption.
• Landlord's PAN is needed if annual rent is more than ₹1 lakh.
• The employer allows the exemption in TDS based on the employee's declaration and proof; the employee can also claim it in their return.

Step 1: Check the tax regime

The new tax regime is now the default. It has lower slab rates, a ₹75,000 standard deduction and a rebate that makes income up to ₹12 lakh effectively tax-free — but it doesn't allow HRA exemption, 80C or most other deductions.

So the first question for any employee asking about HRA is: are you on the old regime? If not, HRA is simply part of taxable salary.

For many employees in metro cities paying significant rent, the old regime can still work out cheaper. Our old vs new tax regime guide walks through the break-even.

Step 2: Work out the three amounts

Amount 1: HRA actually received

The HRA component paid in the salary for the period the employee lived in rented accommodation. If an employee got HRA for 12 months but paid rent for only 8, only 8 months count.

Amount 2: Rent paid minus 10% of salary

Take the rent actually paid for the period and subtract 10% of salary (basic + DA) for the same period. If rent is less than 10% of salary, this amount is zero — and so is the exemption.

Amount 3: 50% or 40% of salary

• 50% of salary if the rented home is in a metro city.
• 40% of salary anywhere else.

Traditionally, the metro cities for HRA have been Delhi, Mumbai, Kolkata and Chennai. Rules under the new Income-tax Act have proposed adding cities such as Bengaluru, Hyderabad, Pune and Ahmedabad to the 50% list. Check the notified rules applicable to your financial year before you treat any other city as a metro.

Note that it's the city where the employee lives and pays rent that matters, not where the office is.

The exemption

HRA exemption = lowest of Amount 1, Amount 2 and Amount 3. The rest of the HRA is taxable salary.

Worked examples

All examples are annual figures for an employee on the old regime, paying rent all year.

Example 1: metro city, rent is the limiting factor

Kavya lives in Mumbai. Basic ₹40,000 a month, HRA ₹20,000 a month, rent ₹18,000 a month.

Item	Calculation	Amount
Annual basic	₹40,000 × 12	₹4,80,000
1. HRA received	₹20,000 × 12	₹2,40,000
2. Rent − 10% of salary	₹2,16,000 − ₹48,000	₹1,68,000
3. 50% of salary (metro)	50% × ₹4,80,000	₹2,40,000
Exempt HRA	Least of the three	₹1,68,000
Taxable HRA	₹2,40,000 − ₹1,68,000	₹72,000

Example 2: non-metro city, the 40% limit bites

Rohit lives in Jaipur. Basic ₹30,000, HRA ₹15,000, rent ₹16,000 a month.

Item	Calculation	Amount
Annual basic		₹3,60,000
1. HRA received		₹1,80,000
2. Rent − 10% of salary	₹1,92,000 − ₹36,000	₹1,56,000
3. 40% of salary	40% × ₹3,60,000	₹1,44,000
Exempt HRA		₹1,44,000
Taxable HRA		₹36,000

Example 3: HRA received is the limit

Farah lives in Chennai. Basic ₹50,000, HRA ₹10,000, rent ₹30,000 a month.

Item	Calculation	Amount
Annual basic		₹6,00,000
1. HRA received		₹1,20,000
2. Rent − 10% of salary	₹3,60,000 − ₹60,000	₹3,00,000
3. 50% of salary		₹3,00,000
Exempt HRA		₹1,20,000

All of Farah's HRA is exempt — but because her HRA component is small, she can't benefit from the high rent she pays. A salary structure with a higher HRA share would give her more exemption. See our guide to salary structure in India.

Example 4: low rent, no exemption

Sunil's basic is ₹35,000 a month (₹4,20,000 a year) and he pays ₹3,000 a month rent (₹36,000 a year). Rent minus 10% of salary = ₹36,000 − ₹42,000, which is negative. His exemption is zero and all his HRA is taxable.

When rent, salary or city changes during the year

The formula should be applied for each period in which the facts were the same — in practice, month by month — rather than on annual totals.

Example: Anita lived in Pune (non-metro under the traditional list) from April to September with rent ₹15,000, then moved to Delhi from October with rent ₹25,000. Her basic is ₹45,000 and HRA ₹22,500 throughout.

Period	HRA received	Rent − 10% of basic	40%/50% of basic	Exempt
Apr–Sep (6 months, non-metro)	₹1,35,000	₹90,000 − ₹27,000 = ₹63,000	40% × ₹2,70,000 = ₹1,08,000	₹63,000
Oct–Mar (6 months, metro)	₹1,35,000	₹1,50,000 − ₹27,000 = ₹1,23,000	50% × ₹2,70,000 = ₹1,35,000	₹1,23,000
Total				₹1,86,000

Calculating on annual totals would have given a different figure. Payroll should split the year at every change in rent, salary or city.

Special situations

Paying rent to parents

You can claim HRA for rent paid to a parent if the arrangement is genuine: the parent owns the house, rent is actually paid (preferably by bank transfer), and the parent shows the rent as income in their own return. Paying rent to a spouse is generally not accepted.

Owning a house in another city

You can claim HRA for rent paid in the city where you work even if you own a house elsewhere. If you own a house in the same city and still rent another one, expect questions; you'll need a genuine reason.

Living with family and contributing to expenses

"Rent" means rent for accommodation under a real arrangement. Sharing household expenses with family isn't rent.

Employees without HRA in their salary

Employees who don't get HRA from their employer at all (and self-employed people) have historically been able to claim a separate, smaller deduction for rent paid under the old regime, subject to conditions and a monthly cap. Check the current provision with your CA.

Joining or leaving mid-year

Only the months in which the employee received HRA and paid rent count. If an employee joined in August, HRA exemption runs from August.

What the employer needs: declaration and proof

The employer allows HRA exemption when deducting TDS. A typical cycle:

1. April: employee submits an investment declaration, including monthly rent, the city and the landlord's details. Payroll uses it to calculate monthly TDS.
2. January–February: employee submits proof — rent receipts or rent agreement and bank statements, and the landlord's PAN if annual rent exceeds ₹1 lakh. If the landlord has no PAN, a declaration from the landlord is usually collected.
3. Final months: payroll recomputes TDS on proved figures. Exemption that isn't proved is reversed, so TDS goes up in February and March.
4. Form 16 shows the HRA exemption allowed.

If the employer didn't allow HRA — for example, because proofs weren't submitted in time — the employee can still claim it in their income tax return, provided they have the documents.

Rent receipts that hold up

A rent receipt should show the tenant's name, the landlord's name and address, the property address, the period and amount, the payment mode and the landlord's signature. Bank transfers are far stronger evidence than cash receipts; large cash rent payments are a common reason for scrutiny.

Common HRA mistakes

1. Claiming HRA under the new regime. It isn't allowed.
2. Using gross salary instead of basic + DA in the 10% and 40%/50% calculations.
3. Treating the office city as the metro test instead of where the employee lives.
4. Calculating on annual totals when rent, salary or city changed during the year.
5. No landlord PAN for rent above ₹1 lakh a year.
6. Paying rent in cash with no bank trail.
7. Inflated or fictitious rent receipts. Rent claims are matched against landlords' returns; mismatches lead to notices for both.
8. Paying rent to a spouse and claiming exemption.
9. Not reversing unproved exemption before year-end, leaving a TDS shortfall for the employer.

How PeopleVio handles HRA

PeopleVio calculates HRA exemption inside payroll TDS, using the same three-part formula described above:

• Salary structures with a separate HRA component alongside basic and other allowances.
• Employee tax declarations — employees choose old or new regime and declare rent paid and metro or non-metro, along with 80C, 80D and 80CCD(1B).
• HR review — HR can approve or reject each declaration, with a note for the employee.
• Automatic HRA exemption under the old regime: least of HRA received, rent minus 10% of basic, and 50%/40% of basic.
• No HRA exemption under the new regime, applied automatically.
• Monthly TDS recalculated from the declaration, PF, standard deduction and tax already deducted in the year.
• Payslips and Form 16 generated from the same payroll data.

What PeopleVio doesn't do (yet): it works on an annual rent and city declaration, so if an employee changes rent or city mid-year, update the declaration and check the year's figures with your CA. It also doesn't verify rent receipts — proof collection and review are still HR's job.

Active employees	Monthly billing	Yearly billing (per month)
20	₹1,180	₹980
50	₹2,450	₹2,050
100	₹4,900	₹4,100

Prices exclude GST. See the pricing page.

HRA checklist for payroll

• Confirm each employee's tax regime for the year.
• Collect rent, city and landlord details in the April declaration.
• Use basic + DA, not gross, as "salary".
• Apply 50% only for cities notified as metros for that year.
• Split the calculation at every change in rent, salary or city.
• Collect rent receipts or agreement and bank proof by January.
• Collect landlord PAN where rent exceeds ₹1 lakh a year.
• Reverse unproved exemption before final TDS.
• Check Form 16 shows the exemption actually allowed.

Frequently asked questions

How is HRA exemption calculated? It's the least of HRA received, rent paid minus 10% of salary (basic + DA), and 50% of salary in a metro city or 40% elsewhere.

Can I claim HRA under the new tax regime? No. HRA exemption is available only under the old regime.

Which cities are metro cities for HRA? Traditionally Delhi, Mumbai, Kolkata and Chennai. Rules under the new Income-tax Act have proposed adding more cities, so check the notified list for your financial year.

Is landlord PAN mandatory for HRA? It's required when annual rent exceeds ₹1 lakh. If the landlord has no PAN, a declaration from the landlord is usually collected.

Can I pay rent to my parents and claim HRA? Yes, if the parent owns the house, the rent is actually paid and the parent declares it as income. Rent to a spouse generally isn't accepted.

What if I forgot to submit rent proof to my employer? You can still claim the exemption in your income tax return if you're on the old regime and have the documents.

Is HRA calculated on basic or gross salary? On basic + DA (plus turnover-based commission, if any). Not on gross.

Does PeopleVio calculate HRA exemption automatically? Yes. Under the old regime, PeopleVio applies the HRA formula from the employee's declared rent and metro status when calculating monthly TDS.

The bottom line

HRA exemption is the lowest of three numbers — and the inputs matter more than the formula. Use basic + DA, the right city, the right period and real rent with a bank trail, and both the employee's tax saving and the employer's TDS will hold up.

Still collecting rent declarations on email and Excel? PeopleVio lets employees declare their regime and rent, applies the HRA formula in monthly TDS and produces payslips and Form 16 from the same data. See PeopleVio's pricing or book a demo.

Related reading: Old vs new tax regime 2026-27 · CTC vs in-hand salary · Payroll software with TDS · Payroll software with Form 16