Every December payroll sends the same email: rent receipts and investment proofs by January. Most salaried people upload the receipts and never check the number the software returns. The HRA exemption is a ten-minute calculation you can do on paper, and this year it is genuinely worth redoing, because the rules changed in April 2026 in a way that puts real money on the table for renters in four cities, including ours.
I teach this computation in the tax planning classes I run in Ahmedabad, and the mistakes repeat. People use the wrong salary figure. Or they claim the exemption while sitting in the new tax regime, where it does not exist at all. What follows is the rule with the actual arithmetic, worked the way I do it across the table in class.
All rules in this article were verified in November 2026 against the Income Tax Department’s own pages and the notified Income-tax Rules, 2026, which are listed at the end.
The rule changed in April 2026
From 1 April 2026, the Income-tax Act, 1961 has been replaced by the Income-tax Act, 2025, and the old Rules of 1962 by the Income-tax Rules, 2026, notified on 20 March 2026. The HRA exemption you knew as Section 10(13A) read with Rule 2A now lives in Section 11 read with Schedule III (Sl. No. 11) of the new Act, computed under Rule 279 of the new Rules.
The computation itself is unchanged. What changed is the city list. For decades, only Delhi, Mumbai, Kolkata and Chennai qualified for the higher 50% limit. From FY 2026-27, Bengaluru, Hyderabad, Pune and Ahmedabad have been added, making it eight cities at 50%. Everywhere else stays at 40%.
One thing has not changed: the exemption is available only under the old tax regime. The new regime, which is the default, taxes your full HRA as salary. So before you spend any time on this, check which regime actually leaves you with more money. We have worked that comparison out at four income levels in our old vs new regime article. If the new regime wins for you, stop reading here and skip the rent receipts, because no amount of HRA structuring, and no consultant, me included, can bring this exemption into the new regime.
The least of three rule
The exempt portion of your HRA is the lowest of three amounts, each computed for the period you actually occupied the rented house:
- The actual HRA you received for that period.
- Rent actually paid, minus 10% of salary.
- 50% of salary if the house is in one of the eight metro cities, 40% of salary anywhere else.
Whatever remains of your HRA after removing the exempt portion is taxed as salary.
The word “salary” here is narrower than most people assume. Rule 279(2) says salary includes dearness allowance if it is provided under the terms of employment, but excludes all other allowances and perquisites. So it is basic plus qualifying DA. Not gross salary. Not CTC.
Four conditions from the department’s own guidance are worth pinning down. You must not own the accommodation you claim rent for. You must actually pay the rent. The exemption runs only for the months you occupied the house, not before or after. And if your rent is 10% of salary or less, item 2 becomes zero or negative, so your exemption is zero however large your HRA component looks on the payslip.
A metro example, line by line
Say a 28-year-old software engineer in Ahmedabad, which now counts as a metro, has this structure for the full year FY 2026-27: basic salary ₹70,000 per month, no DA, HRA of ₹28,000 per month, and she pays ₹25,000 per month in rent. This is an illustration, not a real person.
First the annual figures:
| Input | Monthly | Annual |
|---|---|---|
| Salary (basic, no DA) | ₹70,000 | ₹8,40,000 |
| HRA received | ₹28,000 | ₹3,36,000 |
| Rent paid | ₹25,000 | ₹3,00,000 |
Now the three amounts:
- Amount 1, actual HRA received: ₹3,36,000
- Amount 2, rent minus 10% of salary: ₹3,00,000 − (10% × ₹8,40,000) = ₹3,00,000 − ₹84,000 = ₹2,16,000
- Amount 3, 50% of salary (metro): 50% × ₹8,40,000 = ₹4,20,000
The lowest of the three is ₹2,16,000, so her exempt HRA is ₹2,16,000 and the taxable balance is ₹3,36,000 − ₹2,16,000 = ₹1,20,000, which gets added to her salary income.
If her slab rate under the old regime is 20%, the exemption is worth ₹2,16,000 × 20% = ₹43,200, plus 4% cess on that tax, another ₹1,728. Call it roughly ₹44,928 a year in this illustration. You can rebuild every one of these lines in a spreadsheet in two minutes, and you should, because this is the one number in your Form 16 that nobody else checks for you.
A non-metro example
Now say an accounts manager in Surat: basic ₹50,000 per month, DA of ₹5,000 per month that forms part of his terms of employment, HRA of ₹20,000 per month, rent of ₹16,000 per month, full year.
Salary for HRA purposes is basic plus qualifying DA: (₹50,000 + ₹5,000) × 12 = ₹6,60,000. HRA received is ₹2,40,000 and rent paid is ₹1,92,000.
- Amount 1: ₹2,40,000
- Amount 2: ₹1,92,000 − (10% × ₹6,60,000) = ₹1,92,000 − ₹66,000 = ₹1,26,000
- Amount 3, 40% of salary (non-metro): 40% × ₹6,60,000 = ₹2,64,000
Exempt HRA is ₹1,26,000, and the remaining ₹1,14,000 of his HRA is taxable.
Notice what happened in both examples. The binding constraint was amount 2, rent minus 10% of salary, and that is typical. At moderate rents the 50% or 40% cap sits far above the other two numbers and never comes into play. The cap starts to matter only when your rent is high relative to your salary.
What the upgrade is worth in the four new cities
The 40% versus 50% distinction changes your exemption only if rent minus 10% of salary was being cut off by the old 40% cap, and a line of algebra shows that this happens when your annual rent exceeds 50% of your salary. Take the engineer above. Her rent of ₹3,00,000 is well under half of her ₹8,40,000 salary, so even on the old 40% figure her amount 3 would have been ₹3,36,000, still above ₹2,16,000. Her exemption is the same this year as last. Ahmedabad’s promotion does nothing for her at all.
When the cap does bind, the money is real. Say someone in Ahmedabad has basic of ₹40,000 per month (₹4,80,000 a year), HRA of ₹20,000 per month (₹2,40,000), and pays ₹25,000 per month in rent (₹3,00,000 a year), which is 62.5% of salary. This is common for young renters in good localities.
- Amount 1: ₹2,40,000
- Amount 2: ₹3,00,000 − ₹48,000 = ₹2,52,000
- Amount 3 last year, at 40%: ₹1,92,000. Exemption in FY 2025-26: ₹1,92,000
- Amount 3 this year, at 50%: ₹2,40,000. Exemption in FY 2026-27: ₹2,40,000
The upgrade moves ₹48,000 from taxable to exempt. At a 20% slab plus cess that is ₹48,000 × 20.8% = ₹9,984 a year, from a rule change most salaried people in Ahmedabad, Pune, Bengaluru and Hyderabad have not yet noticed. So the quick test before you rerun anything is this: divide your annual rent by your annual basic plus qualifying DA. Above 50%, redo the computation this year even if you have had the same flat for a decade. Below it, your exemption has not moved.
Paying rent to your parents
This is the question I get most often from young professionals living in a family-owned house. Yes, it is allowed. And yes, the department looks at these claims closely, so do it properly or not at all.
The law nowhere says the landlord cannot be your parent. What it requires is that the arrangement be genuine. In practice that means four things. The house must be owned by the parent, and you must not be an owner or co-owner of it. The rent must actually move, every month, through a banking channel such as NEFT or UPI, not as a cash entry invented in March. There should be a simple rent agreement. And the parent must declare the rent as income from house property in their own return. Rent paid to a spouse does not work, because a couple is treated as living together rather than as landlord and tenant.
Two compliance points changed with the 2026 rules. The employee declaration form is now Form 124, which replaces Form 12BB, and it specifically asks you to disclose your relationship with the landlord. And as before, if your annual rent exceeds ₹1,00,000, you must give your employer the landlord’s PAN, which in this case is your parent’s PAN. Rent receipts are expected where rent exceeds ₹3,000 per month, a threshold the department has kept as an administrative relaxation for small amounts.
Now the family arithmetic, again as an illustration. Say you pay your father ₹20,000 per month, so ₹2,40,000 a year, and municipal taxes of ₹10,000 are paid on the house. His net annual value is ₹2,40,000 − ₹10,000 = ₹2,30,000. Section 22 of the new Act gives him a flat 30% standard deduction, which is 30% × ₹2,30,000 = ₹69,000, leaving ₹1,61,000 taxable in his hands. If his total income including that ₹1,61,000 stays below the basic exemption limit, he pays nothing on it while you save tax at your slab on the exempt HRA, and the household keeps more money. If he is already in the 30% slab, the same arrangement can cost the family more than it saves. Work out both sides of the ledger, his return and yours, before the first transfer goes out.
One more trap at higher rents. If you pay any landlord, parents included, more than ₹50,000 per month, you must deduct TDS at 2% on the rent. It is a once-a-year deduction, made in March or in the last month of the tenancy, deposited through Form 26QC within 30 days, with Form 16C issued to the landlord. Tenants miss this routinely, and it is the sort of thing that surfaces two years later.
Where I see people get this wrong
A few patterns repeat every proof-submission season.
The most common one now is regime confusion: claiming HRA while having opted for, or defaulted into, the new regime. Payroll software usually catches it, but I have seen self-filed returns where the exemption was claimed anyway, and those claims do get picked up.
The second is using the wrong salary base. The 10% deduction and the 50% or 40% cap both run on basic plus qualifying DA. Plugging in gross salary inflates the 10% figure and shrinks your exemption, and plugging in CTC is worse. Open your payslip and read only the basic line and the DA line, if any.
Third, people with rent at or below 10% of salary submit receipts out of habit. Their exemption is zero by construction, so the paperwork achieves nothing.
Fourth, mid-year changes. The rule computes everything for the “relevant period”, so if you moved from Surat to Ahmedabad in October you run two separate computations, six months at 40% and six at 50%, each using that period’s own rent, HRA and salary figures. The same applies if your basic was revised in the middle of the year.
And finally, invented rent. Round-number receipts signed by a relative who never receives the money, for a house the claimant partly owns, is misreporting, and the relationship disclosure now built into Form 124 makes it easier than ever to spot.
If this kind of computation interests you professionally, beyond your own Form 16, it is exactly the sort of material the tax module of the CFP curriculum covers in depth, and it is the bread and butter of the planners we train at HOFP.
Frequently asked questions
Is HRA exemption available under the new tax regime in FY 2026-27?
No. The exemption under Section 11 read with Schedule III of the Income-tax Act, 2025 is available only if you opt for the old tax regime. Under the default new regime, your entire HRA is taxed as salary. Compare both regimes with your full set of deductions before deciding; for many people the new regime still wins despite losing HRA.
Which cities count as metro for HRA exemption now?
From FY 2026-27, eight cities qualify for the 50% of salary limit: Delhi, Mumbai, Kolkata, Chennai, Bengaluru, Hyderabad, Pune and Ahmedabad, under Rule 279 of the Income-tax Rules, 2026. Every other city and town uses 40%. What matters is where the rented house is located, not where your employer is registered.
Can I pay rent to my parents and claim the HRA exemption?
Yes, if the arrangement is genuine: the parent owns the house, you are not a co-owner, rent moves through the bank every month, and the parent declares the rent in their own return. You must disclose the relationship in Form 124 and provide the parent’s PAN if annual rent exceeds ₹1,00,000. Rent paid to a spouse is not accepted.
What counts as salary for the HRA calculation?
Basic salary plus dearness allowance, where the DA is provided under the terms of employment. Rule 279(2) expressly excludes all other allowances and perquisites. Using gross salary or CTC is the single most common error in self-computed HRA claims.
What happens if my rent, city or salary changes during the year?
The exemption is computed for each “relevant period” separately, not once on annual totals. If you moved cities or had a salary revision mid-year, split the year into periods where all inputs were constant, run the least of three test for each period, and add up the exempt amounts.
Sources
- Income Tax Department, “What is the taxability of House Rent Allowance (HRA)?”: https://wm.incometaxindia.gov.in/w/what-is-the-taxability-of-house-rent-allowance-hra-
- Income Tax Department, “Deductions/Allowances allowed to a salaried employee”: https://wm.incometaxindia.gov.in/w/deductions/allowances-allowed-to-a-salaried-employee
- KPMG GMS Flash Alert 2026-081, India: Income-tax Rules, 2026 notified 20 March 2026: https://kpmg.com/xx/en/our-insights/gms-flash-alert/2026/flash-alert-2026-081.html
- Taxguru, “Draft Income Tax Rule 279: Limits for purposes of Schedule III (Table: Sl. No. 11)”: https://taxguru.in/income-tax/draft-income-tax-rule-279-limits-purposes-schedule-iii-table-sl-no-11.html
- Taxguru, “HRA Exemption: 8 Cities Now Qualify for 50% Exemption”: https://taxguru.in/income-tax/hra-exemption-8-cities-qualify-50-percent-exemption-practical-guide.html
- Patron Accounting, “HRA Exemption Rules 2026: Documents, PAN, Landlord” (Form 124, PAN threshold): https://www.patronaccounting.com/blog/hra-exemption-rules-2026-documents-pan-landlord
- Olambit, “HRA Exemption in the New Income Tax Act 2025” (Section 11 mapping, rent to parents and spouse): https://www.olambit.com/blog/hra-exemption-new-income-tax-act-2025/
- AUBSP, “Income Tax Act 2025: Section 22” (30% standard deduction on house property income): https://www.aubsp.com/income-tax-act-2025-section-22/
- TaxGarden, “TDS on Rent: Section 194I and 194-IB Guide for AY 2026-27” (2% TDS above ₹50,000 per month, Form 26QC and 16C): https://taxgarden.in/blog/tds-on-rent-section-194i-194ib-india-ay-2026-27
