Guides / HRA Exemption Explained with an Example

HRA Exemption Explained with an Example

If you receive HRA and pay rent, part of your HRA can be tax-free. This works only under the old tax regime.

The rule: the lowest of three

The exempt amount is the lowest of:

1. The HRA you actually receive.
2. Rent paid minus 10% of basic salary (plus DA).
3. 50% of basic salary in metro cities, or 40% elsewhere.

Example

Basic ₹50,000 a month, HRA ₹20,000, rent ₹18,000, metro city.

The lowest is ₹13,000, so the exemption is ₹1.56 lakh a year and ₹84,000 of HRA is taxable. Calculate yours in the HRA Exemption Calculator.

Documents you need

• Rent receipts or a rent agreement.
• The landlord's PAN if yearly rent is above ₹1 lakh.
• Bank proof of rent payments is a good idea.

Tips

• If you pay rent to parents, they must declare it as income, and the rent must be genuine.
• The list of metro cities has been under review, so check the latest rules.
• Compare both regimes before you choose. See New vs Old Tax Regime.