How Much HRA is Tax-Free in FY 2024-2025? HRA Rules & Calculation Explained
- Indrajeet Sharma
- Mar 11
- 8 min read
Updated: Apr 23
House Rent Allowance (HRA) is a key salary component for employees who live in rented accommodations. It provides tax relief on rental expenses under the old tax regime, helping reduce the taxable portion of salary.
The exempt amount depends on factors like actual rent paid, basic salary, and whether the employee lives in a metro or non-metro city. HRA exemption is allowed only under the old tax regime, where it's calculated based on specific conditions laid out in the Income Tax Act.
In contrast, the new tax regime, introduced to simplify compliance and offer lower tax rates, does not allow HRA exemption. This makes it important for salaried individuals to understand the exemption rules and compare both regimes carefully.
Table of content
How Much HRA is Tax-Free?
The tax-free portion of House Rent Allowance (HRA) under the old tax regime is the least of the following: actual HRA received, rent paid minus 10% of salary, or 50% of salary for metro cities (40% for non-metros). Salary here includes basic and dearness allowance. This exemption is not available under the new tax regime.
Understanding HRA Exemption
What is HRA?
House Rent Allowance (HRA) is a part of a salaried employee’s compensation, provided by employers to support rental housing expenses. It is a tax-friendly salary component for employees living in rented accommodation, as a portion of HRA can be exempt from income tax under specific conditions.
The HRA amount depends on the employer’s salary structure, job location, and internal policies. While both private and government sector employees often receive HRA, the extent of tax exemption is determined based on rules prescribed under the Income Tax Act.
Who Can Claim HRA Exemption?
HRA exemption is available only to salaried employees who:
Receive HRA as part of their salary, and
Pay rent for residential accommodation
To claim the exemption, valid proof of rent payment, such as rent receipts or a registered rental agreement, must be provided. If the annual rent exceeds ₹1 lakh, the landlord’s PAN may also be required.
Self-employed individuals cannot claim HRA under Section 10(13A) because they do not receive a salary-based HRA component. Instead, they may claim rent deduction under Section 80GG, which has separate eligibility rules and lower deduction limits.
It's also important to note that HRA exemption is only available under the old tax regime. Employees who opt for the new tax regime will not be able to claim this benefit, even if they continue to receive HRA and pay rent.
Conditions for HRA Exemption
The tax-free portion of House Rent Allowance (HRA) is determined by three key factors. The amount of HRA that an individual can claim as an exemption is the least of the following three calculations:
Actual HRA Received
The maximum exemption available is capped at the actual amount of HRA received from the employer. If the calculated exemption amount exceeds the actual HRA received, the excess portion will be considered taxable income.
Percentage of Basic Salary + Dearness Allowance (DA)
The second factor depends on whether the employee resides in a metro or non-metro city. The exemption is based on a percentage of the basic salary plus DA:
For employees living in metro cities (Delhi, Mumbai, Kolkata, Chennai), the exemption can be up to 50% of the basic salary + DA.
For employees living in non-metro cities, the exemption is 40% of the basic salary + DA.
Rent Paid Minus 10% of Basic Salary
The third condition considers the amount of rent paid by the employee. The tax exemption is calculated as:
Rent Paid – 10% of Basic Salary = Exempted Amount
This means that the tax-free HRA is determined after deducting 10% of the basic salary from the total rent paid by the employee.
The final exemption amount is the lowest of the three conditions mentioned above.
HRA Exemption Calculation (Example)
Understanding HRA exemption becomes easier with a practical example. Let’s look at two scenarios: one for a metro city and another for a non-metro city.
Case 1: Employee in a Metro City (Mumbai)
Basic Salary: ₹50,000 per month
HRA Received: ₹20,000 per month
Rent Paid: ₹18,000 per month
City of Residence: Mumbai (Metro)
Step-by-step calculation:
Criteria | Amount (₹) |
Actual HRA Received | 20,000 |
50% of Basic Salary | 50,000 × 50% = 25,000 |
Rent Paid - 10% of Basic Salary | 18,000 - (10% of 50,000) = 18,000 - 5,000 = 13,000 |
The lowest of the three values is ₹13,000, so the HRA exemption is ₹13,000 per month (or ₹1,56,000 annually).
Case 2: Employee in a Non-Metro City (Pune)
Basic Salary: ₹50,000 per month
HRA Received: ₹20,000 per month
Rent Paid: ₹18,000 per month
City of Residence: Pune (Non-Metro)
Step-by-step calculation:
Criteria | Amount (₹) |
Actual HRA Received | 20,000 |
40% of Basic Salary | 50,000 × 40% = 20,000 |
Rent Paid - 10% of Basic Salary | 18,000 - (10% of 50,000) = 18,000 - 5,000 = 13,000 |
The lowest value is ₹13,000, so the HRA exemption is ₹13,000 per month (or ₹1,56,000 annually).
HRA Exemption Under the New Tax Regime
With the introduction of the new tax regime in FY 2020-21, salaried individuals can opt for lower tax rates by giving up most exemptions and deductions: including HRA exemption.
If you opt for the new tax regime:
HRA becomes fully taxable, regardless of rent paid or city of residence.
The entire amount received as HRA will be added to your gross salary income.
You cannot claim any exemption under Section 10(13A), even if you live in a rented house.
While the new regime offers simplicity and flat slab rates, taxpayers need to weigh the loss of exemptions (like HRA, 80C, 80D, home loan interest) against the benefit of lower rates.
There have been discussions around allowing some exemptions under the new regime, but as of FY 2024–25, HRA exemption remains unavailable if you opt for the new tax structure.
How to Maximize HRA Benefits
While HRA exemption is only available under the old tax regime, salaried individuals can still make the most of it by ensuring compliance and planning effectively. Here’s how:
1. Maintain Proper Documentation
To claim HRA exemption, it is essential to keep valid documentation, especially if your annual rent exceeds ₹1,00,000.
Rent Receipts: Must include landlord’s name, address, rent amount, and signature.
Rental Agreement: Useful for supporting high-value claims.
Landlord’s PAN: Mandatory if the rent exceeds ₹1,00,000 per annum.
Payment Proof: Bank statements, UPI records, or cheque transactions strengthen your claim.
Accurate documentation can prevent scrutiny or rejection during assessment.
2. Combine HRA with Other Deductions (Where Applicable)
In specific cases, employees can claim HRA exemption and also avail home loan tax benefits:
If you own a house in another city but live in rented accommodation due to work.
If your owned house is under construction, and you’re staying in a rented home.
If your owned property is rented out, and you stay elsewhere in a rented space.
In such cases, HRA can be claimed under Section 10(13A), and home loan interest under Section 24(b), provided all conditions are met.
For self-employed individuals, HRA isn’t allowed, but rent-related deduction may be claimed under Section 80GG, subject to limits and conditions.
3. Choose the Right Tax Regime
HRA exemption is not allowed under the new tax regime. Before finalizing your tax option, compare tax liability under both regimes.
If your deductions, including HRA, 80C, and home loan interest, significantly reduce your taxable income, the old regime may offer greater savings.
If your deductions are minimal or non-existent, the new regime’s lower slab rates could be more beneficial.
Use an online income tax calculator or consult a professional before making a choice between old vs new tax regime.
Conclusion
Understanding how much of your House Rent Allowance (HRA) is tax-free is key to effective tax planning. The exempt portion is calculated based on actual HRA received, rent paid, and your basic salary, with city classification (metro vs non-metro) also playing a role. This calculation is only applicable under the old tax regime.
Employees who opt for the new tax regime must forgo HRA exemption, making it essential to evaluate both regimes before filing their return. With proper documentation and planning, salaried individuals can significantly reduce their tax burden using HRA and other eligible deductions under the old regime.
FAQs
1. What is House Rent Allowance (HRA), and why is it given?
House Rent Allowance (HRA) is a component of a salaried employee’s compensation that helps cover rental expenses. It is provided by employers to assist employees in meeting their accommodation costs. HRA also offers a tax benefit, as a portion of it can be claimed as an exemption under Section 10(13A) of the Income Tax Act, subject to certain conditions.
2. Who is eligible to claim HRA tax exemption?
HRA exemption can be claimed by salaried employees who receive HRA as part of their salary and pay rent for residential accommodation. The employee must actually be residing in a rented house and should not own the property. Additionally, the exemption is available only under the old tax regime.
3. How is the tax-free portion of HRA calculated?
The tax-exempt portion of HRA is determined by the least of the following three amounts:
Actual HRA received from the employer.
50% of basic salary + DA (for metro cities) or 40% of basic salary + DA (for non-metro cities).
Rent paid minus 10% of the basic salary.
Whichever is the lowest among these three is the amount eligible for tax exemption.
4. What happens if I don’t pay rent but still receive HRA?
If an employee receives HRA but does not pay rent, the entire HRA amount is fully taxable. To claim an exemption, the employee must provide valid rent receipts and, in some cases, a rental agreement. False claims can lead to penalties and legal consequences.
5. Can I claim HRA tax exemption if I live with my parents?
Yes, you can claim HRA exemption while living in your parents' house, provided that you pay rent to your parents and they declare this rental income in their tax returns. However, it is advisable to maintain proof of rent payments, such as bank transfers or rent receipts, to substantiate the claim in case of scrutiny by tax authorities.
6. Is there a difference in HRA tax exemption for metro and non-metro cities?
Yes, the percentage of basic salary considered for exemption differs based on the city of residence:
Metro cities (Delhi, Mumbai, Kolkata, Chennai): Up to 50% of basic salary + DA is exempt.
Non-metro cities: Up to 40% of basic salary + DA is exempt.
This distinction is made because rental costs in metro cities are generally higher compared to non-metro cities.
7. What documents are required to claim HRA exemption?
To claim HRA tax exemption, the following documents may be required:
Rent receipts (mandatory if annual rent exceeds ₹1,00,000).
Rental agreement (in case of higher rent payments).
Landlord’s PAN card (if rent exceeds ₹1,00,000 per year).
Proof of rent payment (bank transaction records, UPI payments, etc.).
It is advisable to keep these documents ready, as they may be requested during tax assessments.
8. Can self-employed individuals claim HRA exemption?
No, self-employed individuals cannot claim HRA exemption under Section 10(13A) of the Income Tax Act, as it is applicable only to salaried employees receiving HRA. However, they can claim rent expenses under Section 80GG, which allows a deduction for rent paid under specific conditions, albeit with a lower limit.
9. Does HRA exemption apply under the new tax regime?
No, HRA exemption is not available under the new tax regime introduced in FY 2020-21. If a taxpayer opts for the new regime, they must forgo HRA exemption along with other deductions such as 80C, 80D, and LTA.
10. Can I claim both HRA and a home loan tax deduction together?
Yes, an individual can claim both HRA exemption and home loan tax benefits if they meet the following conditions:
They are living in a rented house while paying EMIs for a different house (e.g., in a different city or under construction).
They can justify why they are not living in their own house (e.g., work location constraints).
However, if the owned house and rented house are in the same city, tax authorities may scrutinize the claim. Proper documentation is recommended.
11. How does HRA exemption impact my overall tax liability?
HRA exemption reduces an individual’s taxable salary, lowering the total income tax liability. The exempted portion of HRA is deducted from the taxable income, reducing the amount of income tax payable. For individuals in higher tax slabs, this exemption can result in significant tax savings.
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