# HRA exemption: the least of three rules, with a worked example

> The tax-free part of your House Rent Allowance is the smallest of three numbers: the HRA you actually get, a share of your basic salary, and the rent you pay minus 10% of your basic. With ₹40,000 basic, ₹20,000 HRA and ₹18,000 rent in a metro, ₹14,000 a month is exempt. Here is why, and how to improve it.

Published 2026-10-08 by Toolcloak. 4 minute read. Original: https://toolcloak.pages.dev/articles/hra-exemption-the-least-of-three-rules-with-a-worked-example
Related free tool: [HRA Exemption Calculator](https://toolcloak.pages.dev/tools/hra-exemption-calculator)

Your payslip shows HRA as one line, but the tax office does not treat the whole line as tax-free. It runs three tests and lets you keep the lowest result. Once you see which test is holding you back, you know exactly what to change.

> **In short**
> - Exempt HRA each month is the **least of three**: (1) HRA received, (2) **50% of basic + DA in a metro (40% elsewhere)**, (3) **rent paid minus 10% of basic + DA**.
> - With ₹40,000 basic, ₹20,000 HRA and ₹18,000 rent in a metro, the three numbers are ₹20,000, ₹20,000 and **₹14,000**. The exemption is **₹14,000 a month**.
> - Everything above the exemption is taxed as salary. Here that is ₹6,000 a month, ₹72,000 a year.
> - This exemption is generally available **only if you use the old tax regime** and actually pay rent. Rules and city lists are updated from time to time, so confirm the current version.

## The three tests

1. **The HRA your employer actually pays you.** If your payslip says ₹20,000, the exemption can never be more than that.
2. **A share of your salary.** 50% of basic plus dearness allowance if you live in a metro, 40% if you do not. “Salary” here means basic + DA, not your CTC.
3. **Rent paid minus 10% of basic + DA.** The first tenth of your salary is treated as the part you would spend on housing anyway, so only the rent above it counts.

The lowest of the three is your tax-free HRA. The rest of the HRA is added to your taxable income.

**The three numbers for ₹40,000 basic, ₹20,000 HRA, ₹18,000 rent (metro)**

| Tests that were not the limit | The test that decides |
| --- | --- |
| ₹20,000 | ₹14,000 |
| Test 1: HRA received is ₹20,000 | Test 3: ₹18,000 rent − ₹4,000 (10% of ₹40,000) |
| Test 2: 50% of ₹40,000 is ₹20,000 | This is the lowest, so ₹14,000 is exempt |
| Both are higher than test 3 | ₹6,000 of your HRA is taxable |

**What happens to ₹20,000 of monthly HRA**

| Step | Amount |
| --- | --- |
| HRA received | ₹20,000 |
| Taxable part | −₹6,000 |
| Exempt HRA | ₹14,000 |

*Over a year the exemption is ₹1,68,000. At a 20% slab that saves roughly ₹35,000 in tax, including 4% cess.*

Try it: [HRA Exemption Calculator](https://toolcloak.pages.dev/tools/hra-exemption-calculator). Enter your basic, DA, HRA and rent to see the exempt and taxable parts.

## How rent changes the answer

Because test 3 depends on your rent, the exemption rises as your rent rises, until test 1 or 2 takes over. Keep the same salary and HRA, and only change the rent:

**Monthly HRA split by rent paid (₹40,000 basic, ₹20,000 HRA, metro)**

|  | Value |
| --- | --- |
| Rent ₹10k | ₹6,000 exempt |
| Rent ₹14k | ₹10,000 exempt |
| Rent ₹18k | ₹14,000 exempt |
| Rent ₹22k | ₹18,000 exempt |
| Rent ₹26k | ₹20,000 exempt |

*Each bar is the ₹20,000 HRA. Below ₹24,000 of rent, test 3 is the limit. From ₹24,000 upward, test 1 and 2 cap the exemption at ₹20,000 and extra rent no longer helps.*

## Metro versus non-metro

Test 2 changes only if the 50% share changes to 40%. In our example, a non-metro city turns test 2 into ₹16,000 (40% of ₹40,000). That is still above test 3, so the exemption stays at ₹14,000. The city matters only when the 40% or 50% test is the lowest of the three.

> **Which cities count as metro?:** Delhi, Mumbai, Kolkata and Chennai have long been the metro cities for this rule. The list has been the subject of changes and proposals, so check the latest rules for your city before you file.

**Annual view of the same example**

|  | Value | Note |
| --- | --- | --- |
| HRA received in the year | ₹2.40 L |  |
| Exempt HRA | ₹1.68 L | Not taxed |
| Taxable HRA | ₹72,000 | Added to income |

## Five things people get wrong

- **Using CTC for the 50% test.** Only basic plus DA counts. If your basic is a small part of CTC, the exemption can be small however large the HRA looks.
- **Claiming HRA without paying rent.** You must actually pay rent. If it is above ₹1 lakh a year, your landlord’s PAN is normally needed, so keep it handy.
- **Assuming it works in the new regime.** The exemption is generally an old-regime benefit. Compare both regimes before you choose, because dropping HRA can still be worthwhile if your other deductions are small.
- **Forgetting to submit proof.** If you do not give rent receipts to your employer, tax is deducted on the full HRA during the year and you reclaim it only when you file your return.
- **Paying rent to parents without a record.** It is allowed when the rent is real and the parent reports it as income. Use a proper agreement and bank transfers.

## A checklist before you submit proofs

1. Find your monthly basic and DA on the payslip, and the HRA component.
2. Write down the real rent you pay for each month of the year.
3. Work out the three tests and take the lowest.
4. Collect rent receipts. You can make them with the [rent receipt generator](https://toolcloak.pages.dev/tools/rent-receipt-generator) if your landlord does not give any.
5. Check the old-versus-new regime choice with your employer’s tax tool or a tax adviser.

> **Ask about your salary structure:** Because test 2 and test 3 both use basic pay, a higher basic with a lower special allowance can raise the exemption. Many employers allow a small change at the start of the year. It is worth asking, but it also raises your PF contribution, so compare the take-home as well.

## Frequently asked questions

### How is HRA exemption calculated?

It is the least of three: the HRA you receive, 50% of basic + DA for metros (40% for others), and the rent you pay minus 10% of basic + DA.

### Can I claim HRA if I live in my parents’ house?

Yes, if you actually pay them rent, they receive it as income, and you keep records such as a rent agreement and bank transfers.

### Do I need rent receipts?

Employers usually ask for receipts as proof. If your annual rent is above ₹1 lakh, the landlord’s PAN is normally required as well.

### Is HRA exempt under the new tax regime?

The HRA exemption is generally available only under the old regime. Compare both regimes with your own numbers before choosing.

### What happens to the part of HRA that is not exempt?

It is added to your taxable salary and taxed at your slab rate.

### Does DA count for the HRA calculation?

Yes, basic salary plus dearness allowance that forms part of retirement benefits is used. Bonuses and special allowances are not.