What is HRA? How is the Exemption on HRA Calculated?

If you're a salaried employee, your payslip might include a component known as House Rent Allowance.  This allowance helps you save an amount in taxes every year if you live in a rented house. The Income Tax Act allows salaried individuals to claim an exemption on HRA, which lowers their taxable income and boosts their in-hand savings. However, calculating HRA exemption has some rules that you need to follow carefully. Understanding how HRA works can help you make better financial decisions and avoid overpaying taxes. Let’s explore how HRA works and how to claim the right exemption.

Understanding HRA

HRA stands for House Rent Allowance. It is provided by an employer to help employees cover the cost of their rented accommodation. This allowance forms a significant part of the salary structure, and a portion of it qualifies for tax exemption under Section 10(13) of the Income Tax Act. The exempt amount is calculated based on certain conditions, and it is the least of the following:

Note: Exemption is available only under the old tax regime. Hence, if you are opting for the new tax regime, you will not be allowed to claim the exemption.

Why HRA Matters in Tax Planning?

It is a powerful tax-saving tool that can help you lower your income tax burden. If you utilise it correctly, it can create real value in your financial planning.

Lower Your Taxable Income with HRA

When you claim HRA exemption, you reduce the portion of your income that gets taxed. This leads to lower taxes and leaves a significant amount in your hands each month. It is a smart way to manage your salary better.

Save Tax Without Making Additional Investments

HRA doesn’t ask you to invest in a policy or fund. You simply need to pay rent and show proof. That's the tax-saving benefit that comes along with the allowance.

Boost Your Monthly Take-Home Salary

Claiming HRA exemption increases your in-hand salary. By cutting down your tax liability, it frees up more money that you can utilise for daily expenses, savings, or financial goals.

Strengthen Your Financial Records

To claim this benefit, you must maintain clear records like rent receipts, rent agreements, and proof of payments. This helps you claim HRA and prepares you for hassle-free tax filing in the future.

You don’t get an exemption on the full amount of HRA you receive. The Income Tax Department uses a structured method to calculate the amount you can claim. Understanding this calculation helps you plan your taxes more effectively and avoid costly mistakes.

Who Can Avail of HRA?

House Rent Allowance is a useful tax-saving option, but only certain individuals qualify for it. To claim this benefit, you must meet specific conditions that are as follows :

Salaried

HRA can be claimed only if it is included in your salary package. This tax benefit is available under Section 10(13A) of the Income Tax Act. If you reside in a rented house and pay rent regularly, you may be eligible to avail of the HRA exemption.

You must provide rent receipts and proof of payment to your employer during tax declaration. If your rent exceeds ₹1,00,000 per year, you also need to submit your landlord’s PAN. You cannot claim HRA if you stay in your own house.

Self-employed

Self-employed individuals do not receive a structured salary that includes HRA. As a result, you cannot claim exemption under Section 10(13A). However, you still have the option to reduce your taxable income using Section 80GG.

Under this section, you can claim a deduction on rent paid. You must not own any residential property at your work location. The least of the following is allowed as a deduction:

• ₹5,000 per month
• 25% of total income
• Rent paid minus 10% of income

Tenants

You must be a tenant to claim HRA. That means you pay rent for a residential property that you don’t own. The property can belong to a landlord, your parents, or another relative, but the rental agreement must be valid. You must transfer rent regularly and maintain proper records.

 If you live in shared accommodation or pay rent partially, you can claim HRA on your share. Just ensure you keep your rent receipts and bank payment proofs for submission and audit purposes.

How is HRA Exemption Calculated?

The Income Tax Department uses a structured method to calculate the amount you can claim. This structured calculation helps you plan your taxes more effectively and avoid costly mistakes.

Identify the Actual HRA Received

First, check the exact amount of House Rent Allowance listed in your salary slip. You cannot claim more than the HRA your employer has paid during the financial year.

Calculate the Rent Paid Minus 10% of Basic Salary

Next, find out how much rent you have paid during the year. Subtract 10% of your basic salary from the total rent paid. It helps you to adjust the exemption based on your income level. If you pay higher rent, this part of the formula works in your favour.

Use the 50% or 40% Rule Based on Your City

The city you live in plays a key role in the exemption limit. If you live in a metro city like Delhi, Mumbai, Chennai or Kolkata, calculate 50% of your annual basic salary. If you live in any other city, calculate 40% instead. This figure becomes the upper limit for your exemption.

Select the Lowest of the Three Values

Compare the following three numbers:

1. Actual HRA received
2. Rent paid minus 10% of the basic salary
3. 50% (metro) or 40% (non-metro) of basic salary

The lowest of these three values is the amount that you claim as an exemption. This method ensures that you get a fair exemption based on your salary and rent.

Example to Understand HRA Calculation

Let’s apply the formula to a real-world scenario. Imagine your salary details for the year look like this:

• Basic Salary: ₹5,00,000
• HRA Received: ₹2,00,000
• Rent Paid: ₹1,80,000
• City of Residence: Pune (non-metro city)

Now, let’s apply the three-step calculation:

Now compare the three amounts:

• Actual HRA received: ₹2,00,000
• Rent paid minus 10% of basic: ₹1,30,000
• 40% of basic salary: ₹2,00,000

The lowest value is ₹1,30,000, which becomes your tax exemption. The remaining ₹70,000 from the HRA received will be added to your taxable income.

Key Rules You Must Follow to Claim HRA Exemption

To claim the HRA Tax exemption successfully, you must follow certain rules set by the Income Tax Act. Missing any of these rules may lead to rejection of your claim or extra tax liability during assessment. 

Keep a Valid Rent Agreement

Always keep a written agreement between you and your landlord. This agreement should clearly mention the rent amount, payment frequency, address of the rented premises, and the names of both parties. It builds credibility and is often requested by your employer or tax authorities.

Submit Rent Receipts

To claim HRA exemption through your employer, you must submit monthly or quarterly rent receipts. These should include the landlord’s name, rent amount, rental period, and signature. Some employers may require revenue stamps if the rent exceeds ₹5,000 per month.

Pay Rent Through Traceable Mode

Always transfer rent through bank accounts or digital wallets. Avoid paying in cash unless necessary. Digital payments provide automatic proof that strengthens your HRA claim and reduces the chances of dispute.

Declare Landlord’s PAN If Rent Exceeds ₹1,00,000

If your total annual rent crosses ₹1,00,000, you must mention your landlord’s Permanent Account Number (PAN) in your tax declarations. Without this, your employer may not sanction the claim.

Live in Rented Accommodation

You can claim HRA exemption only if you actually live in a rented house. Staying in your own property or in a house provided by your employer makes you ineligible, even if you pay rent elsewhere on paper.

Claim Only for the Months You Pay Rent

If you stayed in a rented house for only part of the year, you can claim HRA exemption only for those months. For example, if you moved into your own home in October, you can claim HRA for April to September only.

Avoid Fake Claims

The Income Tax Department has strict rules against inflated or fake HRA claims. Always maintain accurate documents and avoid creating false rent receipts. Any misrepresentation during filing or scrutiny may lead to a penalty.

Documents You Need to Submit for HRA Claim

To ensure your HRA exemption is processed smoothly, you must submit the right documents. These papers help your employer verify your rent payments and allow you to claim the benefit without delays or rejections.

Rent Receipts

Rent receipts are the most important document for HRA claims. Each receipt should include the following details:

• Rent amount paid
• Name of tenant and landlord
• Address of rented property
• Rental period
• Signature of the landlord
• Revenue stamp (if the amount exceeds ₹5,000 per receipt)
  
   

Submit rent receipts regularly, monthly or quarterly, depending on your employer’s policy. You should always pay rent through traceable modes like bank transfers, UPI, or cheques. Keep these transaction records. In case your claim is questioned, this proof confirms that you actually paid the rent mentioned in your declaration.

Rent Agreement

A formal rent agreement strengthens your claim. It must be mentioned:

• Names of both the tenant and the landlord
• Rent amount and duration
• Address of the property
• Payment terms
• Any additional clauses like maintenance or utility charges
  
   

Some employers insist on this document, especially when the rent amount is high.

PAN of the Landlord

If your total annual rent is more than ₹1,00,000, your employer will ask for the PAN of your landlord. You can collect it directly or submit a declaration if the landlord refuses to share it. The PAN helps the tax department match income records.

Declaration Letter 

If you pay rent to your parents or relatives, your employer may ask for a declaration letter confirming the rental arrangement. This letter should include the amount, the relationship, and an acknowledgement of rent received.

Common Mistakes to Avoid While Claiming HRA

HRA is a great way to save tax, but many people lose the benefit due to simple mistakes.. Avoid these pitfalls to make your claim smooth and stress-free.

Paying Rent in Cash Without Proof

If you pay rent in cash and don’t maintain a payment record, your claim can be denied. Always pay rent through bank transfer, UPI, or cheque. 

Not Collecting Rent Receipts

Skipping rent receipts is one of the most common mistakes. Missing receipts weaken your documentation, even if you pay rent regularly. Submit them on time and ensure they are correctly filled out with all required details.

Ignoring the PAN Rule for High Rent

If your rent exceeds ₹1,00,000 in a year and you don’t provide your landlord’s PAN, your employer may disallow your claim. Always collect the PAN in advance or submit a declaration if it’s not available.

Claiming HRA Without Actually Paying Rent

Claiming HRA tax exemption when you live in your own house or in accommodation provided by your employer is not allowed. If you are caught claiming HRA without real rent payments, you may face penalties and interest on unpaid taxes.

Using Fake Rent Agreements

Some people try to create fake rent agreements with family members to claim HRA. The tax department checks for suspicious patterns, especially when rent is paid to close relatives. If you’re claiming rent paid to a parent, make sure the transaction is genuine and backed by real payments.

Claiming for the Whole Year Without Validity

If you moved into a rented home mid-year or shifted to your property, you can’t claim HRA for the entire financial year. Adjust your claim based on the months you paid rent.

Final Thoughts

Saving tax through HRA tax exemption is a smart step toward better financial planning. By understanding the rules, keeping accurate documents, and calculating your claim correctly, you can lower your tax burden while staying fully compliant. But financial wellness doesn’t stop at tax savings. Protecting your health is just as important.

At Niva Bupa, we offer group health insurance plans with extensive coverage, a hassle-free cashless claim process, and access to a wide network of hospitals. With over 1.4 crore satisfied customers, we know how to simplify health protection for both employees and employers. While you focus on saving smart, let us help you stay secure and healthy.

FAQ

1. Can I claim HRA if I live with my parents?

Yes, you can claim HRA if you live in a house owned by your parents, provided you pay rent to them regularly and have a valid rent agreement, payment proofs, and rent receipts.

2. Is HRA tax exemption available under the new tax regime?

No, HRA tax exemption is available only under the old tax regime. If you opt for the new regime, you cannot claim HRA as a deduction.

3. What if I don’t submit my landlord’s PAN for high rent?

 

If your annual rent exceeds ₹1,00,000 and you fail to provide your landlord’s PAN, your employer may reject your HRA claim. Always try to collect and submit the PAN or a written declaration.

4. Can self-employed individuals claim HRA?

No, self-employed individuals cannot claim HRA under Section 10(13A). However, they can claim rent deduction under Section 80GG if they meet the eligibility conditions.

5. Do I need to submit documents to the Income Tax Department?

Generally, documents like rent receipts and agreements are submitted to your employer. However, you should keep them safely in case the Income Tax Department demands them during scrutiny.