House Rent Allowance is the single largest deduction most salaried employees can claim, and the one most often calculated wrongly. The rule is not "your HRA is exempt". It is a three-way test, and you get whichever of the three figures is smallest.
The three figures
Under the HRA entry in Schedule II (formerly Section 10(13A)), your exemption is the least of:
1. The actual HRA you received during the year.
2. Rent paid minus 10% of salary. Salary here means Basic plus Dearness Allowance, not gross.
3. 50% of salary in a metro city, or 40% in a non-metro city.
Whichever is smallest becomes exempt. The remainder is taxable salary.
A worked example
Basic plus DA of Rs. 9,50,000 a year. HRA received Rs. 3,80,000. Rent paid Rs. 3,60,000. Living in a metro city.
Actual HRA received = Rs. 3,80,000
Rent minus 10% of salary = Rs. 3,60,000 − Rs. 95,000 = Rs. 2,65,000
50% of salary = Rs. 4,75,000
The least is Rs. 2,65,000. That is your exemption. The remaining Rs. 1,15,000 of your HRA is taxable.
Notice what happened: this employee received Rs. 3,80,000 of HRA and got to exempt only about 70% of it, because the rent was not high enough relative to salary. That is the usual outcome, and it surprises people who assume HRA is a full exemption.
Why the second test is the binding one
In practice, test two - rent minus 10% of salary - decides the answer for most employees. Test three only binds when your rent is very high relative to your basic. Test one only binds when your employer's HRA component is unusually small.
This has a practical consequence: if your rent is less than 10% of your Basic plus DA, your exemption is zero. No amount of HRA in your CTC changes that.
Metro and non-metro
The metro category now covers Delhi, Mumbai, Kolkata, Chennai, Bengaluru, Hyderabad, Pune and Ahmedabad. Everywhere else is non-metro at 40%.
Two points that cause disputes:
It is where you rent, not where you work. Someone employed by a Gurugram office but renting in Delhi is on the Delhi rate.
A mid-year move changes the rate. If you relocate, the calculation splits into periods and each period uses its own rate. Payroll systems that apply one rate for the whole year get this wrong for anyone who moved.
Documentation you need
Rent receipts for the full period claimed. Monthly is standard practice, though many employers accept quarterly.
A rent agreement, generally required above modest claim levels.
Your landlord's PAN if annual rent exceeds Rs. 1,00,000. This is the requirement that most often derails a claim at proof-submission time, because landlords are sometimes reluctant to share it. Without the PAN the employer must disallow the claim, and you are left to claim it in your return with the evidence to support it.
The mistakes that cost money
Using gross salary instead of Basic plus DA. This inflates both the 10% figure and the 50% figure, and gives a wrong exemption in either direction depending on which test binds.
Claiming rent paid to a spouse. Rent paid to a parent is accepted where the arrangement is genuine, the parent owns the property and declares the rental income. Payment to a spouse is generally not accepted.
Forgetting that HRA is old regime only. Under the new regime the exemption does not exist. An employee who has structured their salary around a large HRA component and then defaults into the new regime loses the whole benefit.
Claiming HRA while also claiming home loan interest on the same property. Claiming both is possible in specific circumstances - working in one city while owning a home in another, for example - but claiming HRA for a property you live in and own does not work.
Declaring an intended rent rather than the rent actually paid. Declarations made in April are projections. If your rent changed, or you moved to a cheaper place, the proof submitted in January must reflect what you actually paid.
The interaction with regime choice
Because HRA only exists under the old regime, a large HRA exemption is one of the few things that can still make the old regime worthwhile. As a rough guide, an employee on Rs. 19,00,000 gross needs somewhere near Rs. 6,75,000 of total deductions to match the new regime - and for most people HRA is the largest single component of getting there.
If your rent is modest relative to your salary, the old regime is unlikely to win regardless of what else you claim.
Check your own figures
Our Tax Regime Calculator applies the three-way test to your basic, HRA received, rent and city, and shows the exemption alongside a full old-versus-new comparison for Tax Year 2026-27.
Where your circumstances are unusual - a mid-year move, rent to a family member, or claiming HRA alongside a home loan - confirm the position with a chartered accountant. These are exactly the claims that attract scrutiny, and the documentation standard is higher than for a straightforward tenancy.