How to calculate HRA exemption, the least-of-three rule worked through

The short answer. Exempt HRA is the least of three amounts: the HRA received, rent minus 10% of salary, and 50% of salary in eight listed cities (40% elsewhere). On a ₹50,000 basic, ₹20,000 HRA and ₹18,000 rent in Mumbai that is ₹13,000 a month, ₹1,56,000 a year, which saves ₹32,448 of tax a year at the old regime's 20% slab, cess included. The new regime allows no HRA exemption.

The rule

Exempt HRA = the least of:

1. the HRA your employer actually paid;
2. rent paid minus 10% of salary (never below zero);
3. 50% of salary if the rented home is in Mumbai, Kolkata, Delhi, Chennai, Hyderabad, Pune, Ahmedabad or Bengaluru, 40% anywhere else.

Taxable HRA = HRA received − exempt HRA.

What counts as salary. Not your gross pay. Salary here is basic pay, plus the dearness allowance that counts for retirement benefits, plus any commission fixed as a percentage of turnover. All three amounts are for the same period, a month or the year.

A worked example

Basic pay ₹50,000 a month, no DA, HRA ₹20,000, rent ₹18,000, living in Mumbai, tax year 2026-27, old regime.

Limit	Working	Per month	For the year
1. HRA received		₹20,000	₹2,40,000
2. Rent − 10% of salary	18,000 − 5,000	₹13,000	₹1,56,000
3. 50% of salary (Mumbai)	50% × 50,000	₹25,000	₹3,00,000

The least is limit 2, so ₹13,000 a month (₹1,56,000 a year) is exempt and ₹7,000 a month (₹84,000 a year) is added to taxable salary. The HRA Exemption Calculator gives the same ₹13,000 tax-free and ₹7,000 taxable for these figures.

Tax saved at each slab

The exemption saves the tax the exempt amount would have paid: the slab rate plus the 4% health and education cess. Old regime, under 60, tax year 2026-27, on the ₹1,56,000 above:

Slab the exempt amount falls in	Rate	Tax saved a year
₹2.5 lakh to ₹5 lakh	5%	₹8,112
₹5 lakh to ₹10 lakh	20%	₹32,448
Above ₹10 lakh	30%	₹48,672

If basic and HRA were the whole salary, ₹8,40,000 a year, the Income Tax Calculator takes old-regime taxable income from ₹7,90,000 to ₹6,34,000 and the tax from ₹73,320 to ₹40,872: ₹32,448 saved. Near ₹5 lakh the rebate of up to ₹12,500 changes the result: on a ₹4,50,000 salary the tax is nil with or without the exemption, and on ₹6,00,000 the exemption takes it from ₹23,400 to nil. Surcharge, above ₹50 lakh, is left out.

The new regime, the default, has no HRA exemption, so none of this applies there.

How much rent makes all of your HRA tax-free

The exemption can never exceed the smaller of limits 1 and 3; here that is ₹20,000. Limit 2 reaches it when rent − 5,000 = 20,000, so rent of ₹25,000 a month (₹3,00,000 a year) makes the whole HRA exempt. Rent above that adds nothing. Rent below 10% of salary, ₹5,000 here, gives no exemption at all: at ₹4,000 rent all ₹20,000 is taxed.

Which limit usually decides

Your situation	Limit that decides	Example (₹ a month)
Rent low compared with salary	2. Rent − 10%	₹50,000 basic, ₹18,000 rent: ₹13,000 exempt
Rent high, HRA modest	1. HRA received	₹50,000 basic, ₹20,000 HRA, ₹25,000 rent: ₹20,000 exempt
HRA generous, city at 40%	3. % of salary	₹40,000 basic + ₹5,000 DA, ₹20,000 HRA, ₹25,000 rent, other city: 40% × 45,000 = ₹18,000 exempt

The third row shows why DA matters: it raises the salary in limits 2 and 3, so limit 2 is 25,000 − 4,500 = ₹20,500 and limit 3 is ₹18,000.

The 2026-27 cities change limit 3

From tax year 2026-27, rule 279 of the Income-tax Rules, 2026 gives 50% to eight cities. For FY 2025-26, rule 2A of the 1962 Rules gave 50% only to Mumbai, Kolkata, Delhi and Chennai. Take ₹40,000 basic, ₹20,000 HRA and ₹25,000 rent in Pune:

Year	Limit 3	Limit 2	Exempt a month	Taxable a year
FY 2025-26	40% × 40,000 = 16,000	21,000	₹16,000	₹48,000
Tax year 2026-27	50% × 40,000 = 20,000	21,000	₹20,000	₹0

Part of a year

Only the months you lived in rented housing and received HRA count. If the Mumbai example rented for 8 months, every limit is worked out on those months: HRA ₹1,60,000, rent − 10% of salary ₹1,04,000, 50% of salary ₹2,00,000. ₹1,04,000 is exempt; HRA for the other four months is taxed in full.

The documents payroll asks for

• Rent receipts for the months claimed, signed by the landlord, with the names and address as on the rent agreement. See how to make a rent receipt for an HRA claim, or make them with the Rent Receipt Generator.
• The landlord's PAN when the year's rent exceeds ₹1,00,000 (CBDT Circular No. 08/2013, paragraph 5.3.9); a landlord with no PAN gives a declaration with name and address instead. ₹18,000 a month is ₹2,16,000 a year, over the line.
• The claim statement: Form 12BB up to FY 2025-26, Form 124 from 1 April 2026 under the Income-tax Rules, 2026.

If the number does not match payroll's

• Payroll shows no exemption. You are probably on the new regime, the default. Section 202(2) of the Income-tax Act, 2025 computes it without Schedule III, item 11.
• The difference is the DA. Only DA that counts for retirement benefits goes into salary; a salary slip shows basic and DA as separate lines.
• The months differ. A month in your own home, or with no HRA, does not count.

Questions people ask

How is HRA exemption calculated?

Take the least of three amounts: the HRA your employer paid, the rent you paid minus 10% of salary, and 50% of salary in eight listed cities or 40% elsewhere. Salary means basic pay plus retirement-counting DA. On ₹50,000 basic, ₹20,000 HRA and ₹18,000 rent in Mumbai, the least is ₹13,000 a month, which is exempt.

How much tax does HRA exemption save?

The exempt amount times your old-regime slab rate, plus 4% cess. ₹1,56,000 a year exempt saves ₹8,112 at the 5% slab, ₹32,448 at 20% and ₹48,672 at 30%. Below ₹5 lakh of taxable income the rebate can make the tax nil anyway. In the new regime there is no HRA exemption, so it saves nothing.

What documents are needed for HRA exemption?

Rent receipts for the months claimed, signed by the landlord; the landlord's PAN when the year's rent is over ₹1,00,000, or the landlord's declaration of having none; and the claim statement, Form 124 from 1 April 2026 (Form 12BB before it). The names and address on the receipts should match the rent agreement.

Is HRA exemption available in the new tax regime?

No. Section 202(2) of the Income-tax Act, 2025 computes salary in the new regime, the default, without the HRA exemption, so all HRA is taxed there. An HRA calculator's answer applies only under the old regime. The same ₹8,40,000 salary pays the same new-regime tax with the ₹1,56,000 exemption or without it.

Sources

Every exemption, limit and rent figure on this page is calculated with the HRA Exemption Calculator's own function, and every tax figure with the Income Tax Calculator's, rounded to the rupee.

• Income Tax Department: Income-tax Rules, 2026 (G.S.R. 198(E), 20 March 2026, in force from 1 April 2026), rule 279: the eight 50% cities and the 40% and 10% limits from tax year 2026-27; last checked 5 Oct 2026
• Gazette of India: Income-tax Act, 2025 (Act 30 of 2025, 21 August 2025), Schedule III (Table: Sl. No. 11), and section 202(2): no HRA exemption in the new regime; last checked 5 Oct 2026
• For FY 2025-26: section 10(13A) of the Income-tax Act, 1961 and rule 2A of the Income-tax Rules, 1962 (four cities at 50%)
• Income Tax Department: slab tables for salaried individuals, and the Finance Bill, 2026 memorandum (rates for tax year 2026-27 unchanged): old-regime slabs, the ₹12,500 rebate up to ₹5 lakh and the 4% cess; last checked 18 Oct 2026
• CBDT: Circular No. 08/2013 of 10 October 2013, paragraph 5.3.9: the landlord's PAN where annual rent exceeds ₹1,00,000; last checked 25 Sep 2026