Payroll

HRA Exemption: How It's Calculated and What HR Teams Should Know

21 August 2026 · 7 min read

House Rent Allowance is usually one of the largest components in an Indian salary structure, and it's also one of the most common sources of payroll queries — employees want to know how much of it is tax-exempt, and HR ends up fielding the same question every filing season. Here's how the exemption actually works.

The exemption applies under the old tax regime

This is the detail that trips up most employees: HRA exemption under Section 10(13A) is available only if the employee has opted for the old tax regime. Under the new (default) tax regime, HRA is fully taxable — there's no exemption to claim. Anyone comparing take-home pay between the two regimes needs to factor this in, since it can materially change which regime works out better for someone paying rent.

The exemption formula

For employees on the old regime who are eligible, the exempt amount is the least of these three figures:

Actual HRA received from the employer
Rent paid, minus 10% of salary (basic pay plus DA)
50% of salary (basic plus DA) for a metro city, or 40% for a non-metro city

Delhi, Mumbai, Kolkata and Chennai are treated as metro cities for this calculation; every other city falls under the 40% figure.

A worked example

Take an employee in Bengaluru (non-metro, for this purpose) with basic pay plus DA of ₹40,000/month, HRA of ₹18,000/month, and actual rent paid of ₹20,000/month.

Actual HRA received: ₹18,000
Rent paid minus 10% of salary: ₹20,000 − ₹4,000 = ₹16,000
40% of salary (non-metro): ₹16,000

The exempt amount is the least of the three — ₹16,000/month here — and the remaining ₹2,000 of HRA received is added to taxable income.

What HR needs from employees to process this

A declaration of rent paid and the landlord's details at the start of the year
Rent receipts or a rent agreement as proof, usually collected at year-end for verification
The landlord's PAN, where annual rent paid exceeds the threshold that requires it
City of residence, since it determines the 50%/40% figure used in the calculation

None of this is unusual — it's the same declaration-and-proof cycle every payroll team runs each year. The friction is almost always operational: chasing employees for documents close to the filing deadline, or HR manually recalculating exemptions for each employee instead of having it computed consistently as part of payroll.

How this works in Manitham HRMS

Employees submit rent declarations and documents directly through self-service, and HRA exemption is calculated as part of the regular payroll and TDS process rather than as a separate year-end exercise. See how salary components and statutory deductions come together in payroll software.

FAQ

Frequently asked questions

Who is eligible to claim the HRA exemption?

You need to be a salaried employee receiving HRA as part of your salary, actually paying rent for accommodation you live in, and have opted for the old tax regime — HRA exemption under Section 10(13A) isn't available under the new (default) tax regime at all, regardless of rent paid.

How is the HRA exemption amount calculated?

The exempt amount is the least of three figures: actual HRA received, rent paid minus 10% of salary (basic pay plus DA), or 50% of salary for a metro city (Delhi, Mumbai, Kolkata, Chennai) or 40% for a non-metro city. Whichever of the three is smallest is the amount that's tax-exempt; the rest of the HRA received is taxable.

Does the city I live in affect my HRA exemption?

Yes. Only Delhi, Mumbai, Kolkata and Chennai count as metro cities for this calculation, using the 50%-of-salary figure. Every other city, including other major cities like Bengaluru, Hyderabad and Pune, uses the 40% figure instead. This directly changes which of the three comparison figures ends up being the smallest.

What documents does HR need to process an HRA claim?

Typically: a declaration of rent paid and the landlord's details at the start of the year, rent receipts or a rent agreement as proof (usually collected at year-end for verification), the landlord's PAN where annual rent exceeds the threshold that requires it, and the employee's city of residence, since that determines the 50%/40% figure used.

When is a landlord's PAN required for an HRA claim?

A landlord's PAN is generally required when the employee's total annual rent paid crosses the threshold set under income tax rules. Below that threshold it typically isn't required, though a declaration may still be requested. Confirm the current threshold against Income Tax Department guidance, since specific limits can be revised.

Can I claim HRA exemption under the new tax regime?

No. The new tax regime, which is the default regime, does not allow the HRA exemption under Section 10(13A) — HRA received is fully taxable under it. Employees paying significant rent should factor this into whichever regime comparison they run, since it can materially change which regime results in higher take-home pay.

What are common mistakes when calculating HRA exemption?

The most frequent ones: assuming the exemption applies regardless of tax regime (it doesn't, under the new regime), using the wrong metro/non-metro percentage for the employee's city, forgetting that the calculation uses basic pay plus DA rather than gross salary, and not comparing all three figures in the formula before picking the exempt amount.