HRA Exemption: the complete, honest guide

The formula (Section 10(13A) + Rule 2A)

The exempt amount is the LEAST of three numbers: (1) the HRA you actually received; (2) rent paid minus 10% of salary; (3) 50% of salary if the rented home is in Delhi, Mumbai, Kolkata or Chennai — 40% anywhere else. "Salary" means basic pay plus dearness allowance (when it counts for retirement benefits) plus fixed-percentage commission, and the comparison runs only over months you actually occupied the rented home.

Example: basic ₹40,000/month in Guwahati (non-metro), HRA ₹16,000, rent ₹15,000. The three numbers per month: HRA received ₹16,000; rent minus 10% of salary = 15,000 − 4,000 = ₹11,000; 40% of salary = ₹16,000. The least is ₹11,000 — that much of the HRA is tax-free, the remaining ₹5,000 is taxed.

The proof your employer will ask for

Rent receipts are required once rent exceeds ₹3,000 a month (CBDT circular practice on salary TDS). A valid receipt shows the period, amount, property address, and the landlord's name and signature — with a ₹1 revenue stamp when a single cash payment exceeds ₹5,000 (Indian Stamp Act, Schedule I Entry 53). Digital payments need no stamp.

Once total rent crosses ₹1,00,000 in a year, you must also report the landlord's PAN to the employer (CBDT Circular 8/2013). No PAN? A signed declaration from the landlord with name and address takes its place. Keep everything even below these lines — the assessing officer can always ask.

Paying rent to parents — allowed, with discipline

Renting from your parents is legitimate when the arrangement is real: they own the home, rent actually moves (bank transfer strongly recommended), receipts exist, and they declare the rent as income. Rent to a spouse is generally not accepted. Claiming HRA alongside a home-loan deduction is possible when you genuinely live in a rented home away from your owned one — be ready to show why.

The new-regime catch

Under the new tax regime (Section 115BAC — the default since FY 2023-24) the HRA exemption simply does not exist. If you pay substantial metro rent, the old regime with HRA often wins; run both numbers before choosing. This one decision is worth a professional's hour.

TDS if your rent is high

Paying more than ₹50,000 a month as an individual? Section 194-IB makes YOU deduct 2% TDS from the rent (rate since 1 October 2024) once a year — deposited with Form 26QC, Form 16C to the landlord. No TAN needed. Businesses paying rent follow the separate Section 194-I (10% above ₹2,40,000/year).