HRA exemption is probably the most underutilised tax benefit for salaried employees in India. Most people know it exists, but either don't claim the full amount they're entitled to, or make errors that could cause problems during tax scrutiny. Let me explain exactly how it works.
The basic setup
If you're salaried and paying rent, your employer likely includes an HRA component in your salary. This HRA, by itself, is fully taxable. But under Section 10(13A) of the Income Tax Act, a portion of it can be exempted from tax — if you actually live in rented accommodation and can prove it.
Important caveat upfront: HRA exemption is only available under the old tax regime. If you've opted for the new regime, your entire HRA is taxable. This is one of the main reasons the old regime still makes sense for people paying high rents in metro cities.
How the exempt amount is calculated
The exempt HRA is the lowest of three amounts. You calculate all three and take the minimum:
First — the actual HRA you receive from your employer. Second — 50% of your basic salary if you live in Delhi, Mumbai, Kolkata or Chennai (40% for all other cities). Third — your actual annual rent minus 10% of your basic salary.
The reason you take the minimum is that the law caps your exemption at whichever of these three is smallest. This prevents people from inflating their rent claims.
A worked example — Bengaluru
Ravi works in Bengaluru (non-metro), earns ₹50,000/month basic salary, gets ₹20,000/month HRA, and pays ₹18,000/month rent.
The three calculations: Actual HRA = ₹20,000. 40% of basic (non-metro) = ₹20,000. Rent minus 10% of basic = ₹18,000 − ₹5,000 = ₹13,000.
The minimum is ₹13,000/month, so Ravi's exemption is ₹1,56,000 per year. At a 20% tax bracket, that saves him ₹31,200 in tax.
The metro vs non-metro confusion
This trips up a lot of people. Only four cities qualify as "metro" for the 50% rule — Delhi, Mumbai, Kolkata, and Chennai. Every other city in India — Bengaluru, Hyderabad, Pune, Ahmedabad, Surat, Jaipur — gets the 40% rate.
I've seen people in Bengaluru claiming 50% because someone told them it's a metro. It isn't, for tax purposes. Always use 40% unless you live in one of those four specific cities.
Documentation you actually need
Rent receipts are required if you pay more than ₹3,000/month rent (which is essentially everyone). Your receipts should include the landlord's name, address, the amount paid, the period it covers, and the landlord's signature. They don't have to be on special paper — even a handwritten receipt works.
If your annual rent is above ₹1 lakh (i.e., more than about ₹8,333/month), you also need your landlord's PAN number. Without it, your employer cannot give you the exemption at source. You can still claim it when filing your ITR, but it becomes more complicated and may attract scrutiny.
Can I claim HRA and home loan interest deduction together?
Yes, and this is a genuinely useful combination that many people don't realise is allowed. If you own a house in your hometown but rent a place in the city where you work, you can claim HRA exemption on the rent you pay for your city accommodation AND claim home loan interest deduction (Section 24) on your hometown property.
The key is that the two properties need to be in different cities for legitimate reasons — typically because you bought a home in your hometown before relocating for work. This is a common situation for IT employees and it's completely legitimate.
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