How Is HRA Exemption Calculated Under Section 10(13A)?

If you are a salaried employee who pays rent, House Rent Allowance (HRA) is one of the most valuable tax breaks available to you - but only a part of it is tax-free, and exactly how much depends on three separate figures. Many people assume the whole HRA on their payslip is exempt; in reality the exemption is capped by a statutory formula under Section 10(13A) of the Income Tax Act. This guide explains the rule, walks through a worked example, and shows where the HRA Calculator does the arithmetic for you.

What HRA exemption actually is

HRA is a component of your salary meant to cover rented accommodation. Under Section 10(13A), the portion you spend on rent (subject to limits) is exempt from income tax, and only the leftover is added to your taxable salary. The catch is that the exemption is not simply "rent paid" or "HRA received" - it is the smallest of three calculated limits. Whichever limit is lowest becomes your tax-exempt HRA, and the rest of the HRA you received is taxed at your slab rate.

The three-way rule

Your exempt HRA is the minimum of these three amounts (all on an annual basis):

1. The actual HRA you received during the year.
2. 50% of (Basic salary + Dearness Allowance) if you live in a metro city, or 40% if you live anywhere else.
3. The rent you actually paid, minus 10% of (Basic + DA).

In formula form: Exempt HRA = min(actual HRA, 50% or 40% of Basic+DA, rent paid − 10% of Basic+DA). The third limit is the one that catches most people out: because you must first subtract 10% of your basic pay from the rent, paying very little rent (or none) can shrink or wipe out the exemption entirely. Note that "salary" here means Basic plus Dearness Allowance (and any commission as a fixed percentage of turnover) - not your gross CTC.

Metro vs non-metro

Only four cities count as metros for HRA purposes: Delhi, Mumbai, Kolkata and Chennai. Living in one of these lets you use the more generous 50% limit on the second figure. Every other city - including high-cost ones like Bengaluru, Hyderabad, Pune and Gurugram - uses the 40% limit. This is purely a tax definition and has nothing to do with how expensive the city actually is, which is why the rule occasionally feels unfair to people renting in non-metro tech hubs.

A worked example

Suppose Priya works in Mumbai (a metro) and her annual figures are: Basic + DA of 6,00,000, HRA received of 3,00,000, and rent paid of 3,00,000 (25,000 a month). The three limits work out as follows:

• Actual HRA received: 3,00,000.
• 50% of Basic + DA: 50% × 6,00,000 = 3,00,000.
• Rent paid − 10% of Basic + DA: 3,00,000 − 60,000 = 2,40,000.

The smallest of the three is 2,40,000, so that is Priya's tax-exempt HRA. The remaining 60,000 (3,00,000 received − 2,40,000 exempt) is added to her taxable income. In this case the rent-based limit is the binding one - which is typical, because the 10%-of-basic deduction usually pulls the third figure below the other two. If Priya lived in a non-metro city, her second limit would drop to 40% × 6,00,000 = 2,40,000, but the exempt amount would stay 2,40,000 because the third limit is already the lowest. You can reproduce all of this instantly in the HRA Calculator by entering the annual figures and toggling the metro / non-metro switch.

HRA and the old vs new tax regime

This is the part people most often get wrong: HRA exemption is available only under the old tax regime. If you opt for the new regime - now the default - you cannot claim it at all, along with most other deductions. So before you bank on the HRA break, check whether the old regime actually leaves you better off overall. For many renters with a home loan and decent 80C investments it does, but not always. Our guide on the old vs new tax regime walks through that comparison, and the underlying numbers feed into the Income Tax Calculator.

What you need to claim it

To claim HRA exemption you should keep rent receipts and, where rent exceeds 1,00,000 a year, your landlord's PAN. Rent paid to family is allowed if it is genuine - real payments, a real rental arrangement and the landlord declaring the rent as income - but tax authorities scrutinise such claims, so keep clean records. You can claim HRA and a home-loan interest deduction together if, for example, you rent in your work city while owning a home elsewhere (or a let-out property), but claiming HRA on a home you live in and own does not work.

Common mistakes to avoid

Three errors recur. First, using gross salary instead of Basic + DA inflates the second and third limits and overstates the exemption. Second, forgetting the "minus 10% of basic" step in the third limit - it is easy to assume the full rent is exempt. Third, claiming HRA under the new regime, where it simply does not apply. Run your real numbers through the HRA Calculator to see the exempt and taxable split, then confirm the old regime is the right choice for your overall tax before you rely on it.