HRA Exemption Rules 2026-27: Formula, 8 Metros and Proofs

HRA (house rent allowance) is partly tax-free only if you pay rent and choose the old tax regime. The exempt part is the lowest of three numbers: the HRA you received, rent paid minus 10% of salary, and 50% of salary in a metro (40% elsewhere). From tax year 2026-27, eight cities count as metros, up from four, which raises the exemption for many tenants in Bengaluru, Hyderabad, Pune and Ahmedabad.

Where HRA sits in the new law

Under the Income-tax Act, 1961, HRA was exempt under Section 10(13A) with Rule 2A. From 1 April 2026, under the Income-tax Act, 2025, it is exempt under Section 11 read with Schedule III, with the details in Rule 279 of the Income-tax Rules, 2026. The formula did not change; the metro list did.

HRA exemption is not available in the new regime (Section 202, old Section 115BAC). If you are on the default new regime, all HRA is taxable, and the only question is whether the old regime would save you more. Our new vs old tax regime guide shows the break-even.

The formula

The exempt HRA is the least of:

1. Actual HRA received from your employer
2. Rent paid minus 10% of salary
3. 50% of salary if you live in a metro city, 40% otherwise

"Salary" here is narrower than your gross pay: it means basic pay + dearness allowance (if it counts for retirement benefits) + commission at a fixed percentage of turnover. Special allowance, bonus and other allowances are excluded. All figures are for the months you actually lived in rented housing and received HRA.

The new metro list

The change applies to salary and rent from 1 April 2026. When you file your return for FY 2025-26 (in 2026), Bengaluru and the other three new cities still use 40%. Some commentaries were based on the draft rules published in February 2026; check your employer's payroll and the notified rule if your claim depends on it.

Worked example: a Bengaluru tenant

Kiran works in Bengaluru and is on the old regime.

• Basic pay: ₹50,000 a month (₹6,00,000 a year); no DA
• HRA received: ₹25,000 a month (₹3,00,000 a year)
• Rent paid: ₹28,000 a month (₹3,36,000 a year)

The exemption rises by ₹36,000. If Kiran's income is in the 30% slab, the illustrative saving is ₹36,000 × 30% = ₹10,800, plus 4% cess of ₹432, a total of ₹11,232 a year.

Notice that test 2 now limits him. Paying more rent would raise the exemption until rent minus 10% of salary reaches ₹3,00,000, that is, rent of ₹3,60,000 a year. That is not a reason to pay more rent, but it shows which lever binds.

A second example: a smaller city

Sana lives in Jaipur. Basic + DA: ₹4,80,000 a year. HRA: ₹1,92,000. Rent: ₹1,44,000.

1. Actual HRA: ₹1,92,000
2. Rent − 10% of salary: ₹1,44,000 − ₹48,000 = ₹96,000
3. 40% of salary: ₹1,92,000

Exempt HRA is ₹96,000. Here the low rent is the limiting factor, and the metro change does not affect her.

Documents and disclosures

From tax year 2026-27, the employee declaration form for claims to the employer is Form 124 (it replaced Form 12BB). As of October 2026, expect to provide:

• Rent receipts or a rent agreement, and proof of payment (bank transfer is strongly preferred over cash)
• Landlord's PAN if annual rent exceeds ₹1 lakh. If the landlord has no PAN, a declaration from the landlord is usually required
• Landlord's name and address, and your relationship with the landlord, which Form 124 now asks for

If you miss the employer's deadline, you can still claim HRA in your return, provided you are on the old regime and hold the proofs. Your employer's Form 16 or Form 130 will then show HRA as taxable, and you claim the exemption directly in the ITR.

Common situations

Rent paid to parents. Allowed if the parent owns the house, there is a rent agreement, rent is paid by bank transfer, and the parent declares it as rental income. Tax officers do look at these claims, especially when the relationship is now disclosed in Form 124.

Rent paid to your spouse. Generally not accepted, since spouses commonly share a household and courts have treated such arrangements as lacking substance.

You own a house elsewhere. You can claim HRA for a rented home in the city where you work even if you own a house in another city. You may also claim home loan interest on the owned house; see home loan tax benefits.

You own a house in the same city but rent another. The claim is not barred outright, but expect scrutiny. Keep a clear reason, such as distance from the office or the owned house being let out.

Part-year renting. Calculate the three tests month by month (or for each period with different rent or salary), not on annual totals, if anything changed during the year.

No HRA in your salary. Self-employed people and employees without HRA can claim a separate rent deduction under the old regime (old Section 80GG, renumbered in the 2025 Act). It is the least of ₹5,000 a month, 25% of adjusted total income, and rent minus 10% of adjusted total income, and you must not own a home in the city where you live or work. It requires a declaration in Form 10BA under the old rules.

Mistakes that lead to notices

• Claiming HRA while on the new regime
• Paying rent in cash with no trail, especially to relatives
• Fake rent receipts. Tax officers can match landlord PANs against the landlord's returns
• Using gross salary instead of basic + DA in the formula
• Applying 50% for Bengaluru, Pune, Hyderabad or Ahmedabad in an FY 2025-26 return

Estimate your total tax with both regimes using the income tax calculator. For how HRA shows up on your payslip, see CTC vs gross vs take-home salary.

Key takeaways

• HRA exemption is the least of actual HRA, rent minus 10% of salary, and 50% (metro) or 40% (non-metro) of salary.
• As of October 2026, under Section 11 and Schedule III of the Income-tax Act, 2025 (old Section 10(13A)), eight cities qualify for 50% from tax year 2026-27.
• HRA exemption is available only under the old regime.
• Landlord PAN is needed for rent above ₹1 lakh a year, and Form 124 now asks for your relationship with the landlord.
• Rent to parents can work if it is genuine and documented; rent to a spouse generally does not.