HRA Exemption: How to Calculate It (With the 2026 Eight-City Rule)

If your salary includes House Rent Allowance (HRA) and you live in a rented home, part of that allowance can be tax-free. Many people get the calculation wrong, or don't claim it at all. Here's the rule, a worked example, and the 2026 change that brings four more cities into the higher 50% limit.

The rule: the lowest of three amounts

Your tax-free HRA is the smallest of:

1. The HRA you actually receive from your employer.
2. Rent you pay, minus 10% of your salary.
3. 50% of your salary if you live in one of the eight big cities, 40% anywhere else.

Here “salary” means basic pay plus dearness allowance (where DA counts for retirement benefits), not your full CTC. The rest of your HRA is taxable with your salary.

Exempt HRA = lowest of (HRA received, rent − 10% of salary, 50% or 40% of salary)

Eight cities now get 50%

From 1 April 2026, the Income-tax Rules, 2026 extend the 50% limit to Bengaluru, Hyderabad, Pune and Ahmedabad, alongside Delhi, Mumbai, Kolkata and Chennai. If you live in one of the four new cities, your tax-free HRA may go up from this year. Returns for FY 2025-26 still use the old list of four.

Worked example

Basic pay ₹50,000 a month, HRA ₹20,000, rent ₹25,000, living in Pune:

Here the whole ₹2,40,000 of HRA is tax-free, because the HRA received is the lowest limit. If the rent were only ₹15,000, limit 2 would drop to ₹10,000 a month, and ₹1,20,000 of the HRA would be taxed.

How much rent gives the full benefit?

Your HRA becomes fully tax-free once rent reaches HRA received + 10% of salary, here ₹25,000 a month, as long as the HRA is within the 50% or 40% limit. Paying more rent than that doesn't increase the exemption.

Rules people miss

• Old regime only. HRA exemption isn't available in the new tax regime. Check which regime wins for you in our old vs new tax regime guide.
• Landlord's PAN is needed if your rent is more than ₹1 lakh a year. Keep rent receipts or a rent agreement as well.
• Paying rent to parents is allowed if you genuinely pay them and they own the house. They must show the rent as income. Rent to a spouse is generally not accepted.
• Living in your own house? No HRA exemption, because you don't pay rent.
• No HRA in your salary? Self-employed people and employees without HRA can claim rent under section 80GG in the old regime, capped at ₹5,000 a month.