HRA Exemption Calculation FY 2026-27 — 4 Worked Examples With Step-by-Step Formula

✓ Updated for FY 2026-27 new metro city list (effective 1 April 2026) · Form 12BB replaced by Form 124 · Source: Section 10(13A) Income Tax Act · incometax.gov.in

House Rent Allowance is one of the most valuable tax-saving components in a salaried person's pay structure — but also one of the most frequently miscalculated. Most employees either claim too little (leaving money on the table) or overclaim (risking scrutiny), almost always because they misidentify which of the three HRA limits applies to their specific situation.

The formula sounds simple: HRA exemption is the lowest of three amounts. But knowing which of the three conditions is the binding limit for your income, city, and rent level — and understanding the one definition of "salary" that everything hinges on — is what separates a correctly filed claim from an error that gets flagged during ITR processing.

This guide explains the exact formula, the updated metro city list for FY 2026-27, and four complete worked examples covering different cities, income levels, and situations — including paying rent to parents and what to do if your salary has no HRA component at all.

The HRA Exemption Formula — Section 10(13A)

HRA exemption is the LOWEST of these three amounts. Every word of this matters — it is not the highest, not the average, not your choice. It is always the lowest of the three, calculated for the full year.

The lowest of these three is your HRA exemption. Any HRA received above this amount is added to your taxable salary and taxed at your applicable slab rate.

What "salary" means — the most misunderstood part

For HRA calculation, salary means:
Basic Salary + Dearness Allowance (only the portion that forms part of retirement benefits) + Commission (only if paid as a fixed percentage of turnover)

It does NOT include: HRA itself, special allowances, LTA, medical allowance, performance bonuses, or any other pay component.

This is the single most common error. Many people calculate Conditions 2 and 3 using their gross salary or CTC — both are wrong and both overstate the exemption. Always use Basic + DA only.

Metro cities for HRA — FY 2026-27 (updated)

Use the city where you actually pay rent and reside — not where your employer's office is located.

Example 1 — Mumbai (Metro), Software Engineer

Profile: Rohan, senior developer, ₹60,000 basic/month, no DA. HRA received: ₹27,000/month. Rent paid: ₹25,000/month. City: Mumbai (metro).

Key takeaway: Even though Rohan lives in a metro, Condition 3 is the binding limit — not Condition 2. His rent is not high enough relative to his salary for the 50% rule to help him. He could save more tax by either paying higher rent or negotiating a higher HRA component in his salary structure.

Example 2 — Bengaluru (Now Metro from FY 2026-27), Product Manager

Profile: Ananya, product manager, ₹50,000 basic/month, no DA. HRA received: ₹20,000/month. Rent paid: ₹22,000/month. City: Bengaluru (metro from 1 April 2026).

Example 3 — Jaipur (Non-Metro), HR Manager

Profile: Vikram, HR manager, ₹35,000 basic/month, no DA. HRA received: ₹14,000/month. Rent paid: ₹12,000/month. City: Jaipur (non-metro, 40% rate).

Key takeaway: Vikram could increase his HRA exemption simply by paying more rent — paying ₹14,000/month instead of ₹12,000 would increase Condition 3 to ₹1,26,000, saving an additional ₹7,488 in tax at the 30% slab. However, the rent increase (₹24,000/year extra) must genuinely be paid — not fabricated.

Example 4 — Delhi (Metro), When Actual HRA is the Binding Limit

Profile: Sunita, finance analyst, ₹80,000 basic/month, no DA. HRA received: ₹24,000/month. Rent paid: ₹40,000/month. City: Delhi (metro).

Key takeaway: Sunita's entire HRA is exempt because her rent is high enough to satisfy both Condition 2 and Condition 3 beyond the actual HRA received. Condition 1 — actual HRA received — is the lowest and therefore the binding limit. This is the best-case scenario: 100% of HRA received is tax-free. Sunita should negotiate for a higher HRA component in her salary structure, since her rent clearly justifies it and any additional HRA would also be fully exempt given her current rent level.

Paying Rent to Parents — Fully Valid If Done Correctly

One of the most underused HRA strategies is paying rent to a parent who owns the property you live in. This is completely legal and routinely accepted by income tax authorities — provided it is structured correctly.

The three mandatory conditions

One — The property must be owned by the parent. If the property is jointly owned, only the owner-parent's share of rent is valid. You cannot pay rent for a property you yourself own.

Two — A formal registered rental agreement must exist between you (tenant) and the parent (landlord), specifying the monthly rent, duration, and property address. A verbal arrangement is not sufficient.

Three — Rent must be paid via bank transfer. Cash payments are legally permissible but create audit risk if there is no documentary trail. Bank transfers create an irrefutable payment record. The parent must declare this rental income in their own ITR under "Income from House Property."

Why this works financially

If your parent is in a lower tax bracket — or has income below the basic exemption limit — they may pay little or no tax on the rental income you pay them. You, in a higher slab, save significantly more in tax on the HRA exemption than the parent pays on the rental income received. The net family tax saving is real.

Important: Annual rent exceeds ₹1,00,000, so landlord's (parent's) PAN is mandatory in Form 124 submitted to employer. You cannot avoid this requirement.

What you cannot do

You cannot pay rent to your spouse and claim HRA exemption — the Income Tax Act specifically disallows it. You also cannot pay rent to a property that is in your own name. If you live in your own house, HRA received is fully taxable.

No HRA in Your Salary? Use Section 80GG

If your salary structure does not include a House Rent Allowance component — common for self-employed individuals, freelancers, consultants, or salaried employees whose CTC is structured without HRA — you cannot use Section 10(13A). There is an alternative: Section 80GG.

Section 80GG allows a deduction for rent paid even when no HRA is received, subject to these three conditions being met:

You must not own any residential property in the city where you live and work. You must file Form 10BA declaring that you pay rent. Neither you nor your spouse or minor child should own residential property anywhere in India (for the purpose of this deduction).

Section 80GG — the formula

Deduction = LOWEST of:
1. Rent paid minus 10% of adjusted gross income
2. 25% of adjusted gross income
3. ₹5,000 per month — ₹60,000 per year (hard annual cap)

The ₹60,000 annual cap is why Section 80GG is significantly less valuable than a properly structured HRA exemption, which can reach ₹1–3 lakh or more depending on income and city. If you are employed and have the option to restructure your CTC to include an HRA component, it is almost always worth doing.

Documents Required — What Changed in FY 2026-27

Form 124 replaces Form 12BB from 1 April 2026

Submit Form 124 (the new investment declaration form under the Income Tax Act 2025) to your employer for HRA claims. This replaces Form 12BB, which was used for FY 2025-26 and earlier. Form 124 adds a mandatory landlord-relationship disclosure field — you must now state whether the landlord is a relative (parent, sibling, in-law) or unrelated party. This disclosure does not disallow the claim, but it flags related-party transactions for potential scrutiny.

Complete document checklist

• ☐ Form 124 submitted to employer at start of year (and updated if rent changes mid-year)
• ☐ Monthly rent receipts — landlord name, address, amount, date, signature
• ☐ Bank transfer statements showing monthly rent payments
• ☐ Rental agreement (registered preferred, unregistered acceptable)
• ☐ Landlord's PAN card copy — MANDATORY if annual rent exceeds ₹1,00,000
• ☐ For rent paid to parents: parent's ITR acknowledgment showing rental income declared

Keep all documents for a minimum of 6 years from the end of the assessment year — this is the standard scrutiny window under the Income Tax Act.

Frequently Asked Questions

How is HRA exemption calculated for FY 2026-27?

HRA exemption under Section 10(13A) of the Income Tax Act is calculated as the lowest of three conditions: first, the actual HRA received from your employer during the year; second, 50% of your salary (Basic + DA) if you reside in a metro city, or 40% if you reside in a non-metro city; third, the actual rent you paid during the year minus 10% of your salary. The salary figure used for Conditions 2 and 3 is Basic + Dearness Allowance only — not gross salary, not CTC, not total monthly take-home. Whichever of the three conditions gives the lowest number is your HRA exemption. Any HRA received above that amount is added to your taxable salary and taxed at your slab rate. This calculation applies only under the Old Tax Regime — under the New Regime, HRA is fully taxable with no exemption.

Which cities qualify as metro for HRA in FY 2026-27?

From 1 April 2026, eight cities qualify for the 50% metro HRA limit: Delhi, Mumbai, Kolkata, Chennai — the original four — plus Bengaluru, Pune, Hyderabad, and Ahmedabad, which have been elevated to metro status from FY 2026-27. For FY 2025-26 (the return filed in July 2026), the old four-city rule still applies — Bengaluru, Pune, Hyderabad, and Ahmedabad were non-metro for that year. All other cities — Jaipur, Chandigarh, Lucknow, Coimbatore, Surat, Kochi, Bhopal, Nagpur, Patna, Indore, and every other city not in the above list of eight — attract the 40% non-metro rate. The relevant city is where you actually reside and pay rent, not where your employer's registered office is located.

Can I pay rent to my parents and claim HRA exemption?

Yes, paying rent to parents who own the property is fully valid and legally accepted under Indian income tax law. Three conditions must be met for the claim to withstand scrutiny: a registered or documented rental agreement exists between you and the parent, rent is paid via bank transfer (creating a clear payment trail), and the parent declares the rental income in their own income tax return under Income from House Property. You cannot pay rent to a spouse and claim HRA exemption — the Income Tax Act specifically disallows this. You cannot pay rent on a property you yourself own or co-own. If annual rent paid to your parent exceeds ₹1,00,000, you must obtain their PAN and submit it in Form 124 to your employer.

Is HRA exemption available under the New Tax Regime?

No. HRA exemption under Section 10(13A) is available exclusively under the Old Tax Regime. Under the New Tax Regime — which is the default from FY 2025-26 — the entire HRA received from your employer is included in your taxable salary with no exemption at any level, regardless of how much rent you actually pay. This is the primary reason why employees receiving substantial HRA — particularly those in high-rent metro cities — sometimes find the Old Tax Regime more beneficial despite its higher slab rates, when the HRA exemption is large enough to offset the rate difference. To determine which regime is better for your specific income and HRA, run both calculations in the income tax calculator.

What if I pay rent but my salary has no HRA component?

If you pay rent but your salary does not include a House Rent Allowance component — common for freelancers, self-employed individuals, and some salaried employees with restructured CTCs — you cannot claim under Section 10(13A). You may instead claim a deduction under Section 80GG, which is available to rent-paying taxpayers who receive no HRA. The Section 80GG deduction is the lowest of: rent paid minus 10% of adjusted gross income, 25% of adjusted gross income, or ₹5,000 per month (₹60,000 per year maximum). The ₹60,000 annual cap makes Section 80GG significantly less valuable than a properly structured HRA exemption — a salaried employee in Mumbai with ₹1,00,000 or more in annual HRA exemption benefits far more than the ₹60,000 ceiling of 80GG.

What documents do I need to claim HRA exemption in FY 2026-27?

For FY 2026-27, submit Form 124 (which replaces the earlier Form 12BB from 1 April 2026) to your employer. Attach: monthly rent receipts showing landlord name, address, amount, and signature for each month; your landlord's PAN card copy if annual rent paid exceeds ₹1,00,000 (this is a hard legal requirement, not optional); bank transfer records showing rent payments; and a copy of the rental agreement. For rent paid to parents, add the parent's ITR acknowledgment or evidence that they have declared the rental income. At ITR filing time, you declare the HRA exemption in Schedule HRA — no physical documents are submitted to the Income Tax Department at this stage, but retain all originals for a minimum of 6 years from the assessment year, which is the standard period for which the department can reopen your return for scrutiny.