House Rent Allowance:
Definition, Uses & Comparison

House Rent Allowance (HRA) is a salary component provided by employers to employees to help cover the cost of renting residential accommodation. It is an integral part of salary structure designed to assist employees with housing expenses, particularly in cities where rental costs are high. HRA is provided as monthly compensation to help offset accommodation costs when employees live in rented housing near their workplace.

Under Section 10(13A) of the Income Tax Act, 1961, salaried employees living in rented accommodation can claim HRA as a partial or full tax exemption, but only if they opt for the old tax regime. HRA cannot be claimed under the new tax regime, which offers relaxed slab rates with limited deductions.

Related terms: Section 10(13A), Section 80GG, tax exemption, basic salary

Eligibility for HRA exemption depends on 5 key criteria:

• The individual must be a salaried employee receiving HRA as part of their salary structure
• The employee must live in rented accommodation and actually pay rent
• The employee must file Income Tax Return (ITR) under the old tax regime
• The employee must provide necessary documentation such as rent receipts and rental agreement
• If annual rent exceeds Rs. 1 lakh, the landlord's PAN must be furnished to the employer

Self-employed individuals and employees who do not receive HRA as part of their salary are not eligible for HRA exemption. However, they can claim deduction under Section 80GG if they pay rent. Persons opting for the new tax regime are not eligible for HRA exemption, as house rent allowance is a tax deduction option available exclusively under the old tax regime.

You cannot claim HRA exemption if you live in a house owned by you or your spouse. You can claim tax benefits on a property your parents own if you pay rent to them, but a proper rent agreement, proof of payment, and rent receipts are required to avoid implications during tax scrutiny.

HRA exemption is calculated as the lowest of 3 amounts:

1. Actual HRA received from employer
2. 50% of basic salary for metro cities (Delhi, Mumbai, Kolkata, Chennai, Bengaluru, Pune, Hyderabad, Ahmedabad) or 40% of basic salary for other cities
3. Rent paid minus 10% of basic salary

The term 'Salary' in the context of HRA includes basic pay, dearness allowance, and commission as a percentage of turnover. The HRA exemption amount eligible for tax benefits is the least figure among these calculations.

For example, if an employee works in Mumbai and pays rent of Rs. 20,000 per month with a basic salary of Rs. 55,000 and receives HRA of Rs. 25,000, the calculation would be:

• Actual rent paid: (Rs. 20,000) – (10% of Rs. 55,000) = Rs. 14,500
• HRA received: Rs. 25,000
• 50% of salary (metro city): Rs. 27,500

Since Rs. 14,500 is the lowest amount, this becomes the HRA tax exemption limit under Section 10(13A).

The New Income Tax Rules, 2026 extended the 50% HRA exemption to 8 cities. Previously limited to 4 metro cities, the exemption now covers Delhi, Mumbai, Kolkata, Chennai, Bengaluru, Pune, Hyderabad, and Ahmedabad. Employees residing in these cities can claim 50% of their basic salary as HRA exemption, while employees in other cities can claim 40% of basic salary.

Though the Income Tax Act 2025 takes effect from 01st April 2026, the provisions of the 1961 act apply for Assessment Year 2026-27, as it pertains to income earned up to 31st March 2026.

There is no necessity to submit all supporting documents along with the income tax return, but for submission of proofs to the employer and to respond to the department in case of any notices, 6 key documents are recommended:

1. Rent receipts for the financial year
2. Rental agreement with the landlord
3. Form 12BB submitted to employer
4. Bank payment proof for rent transfers
5. Salary slip showing HRA component
6. PAN of landlord if rent exceeds Rs. 1 lakh per annum

If the landlord does not have a PAN, as per circular No. 8/2013 dated 10 October 2013, the landlord must sign a self-declaration stating they do not have a PAN. Without furnishing these documents, you may lose out on the HRA exemption. If your landlord is an NRI, you must deduct and deposit 30% TDS (plus applicable cess) before paying rent.

You can claim HRA exemption if you pay rent to your parents, but specific conditions must be met. You must pay rent to them via bank transfer, draft a rental agreement, and document all rental receipts for the year. The rent paid must be disclosed as rental income in your parent's Income Tax Return to avoid implications during tax scrutiny.

However, if you live in a house owned by you or your spouse, you cannot claim HRA benefits. Even if you pay rent to your parents or siblings without proper documentation, such payments do not qualify for tax exemption.

You can claim both HRA exemption and home loan interest deduction together if you meet specific conditions. If you can justify that you have lived in different accommodation and paid rent for the same, you can claim HRA and home loan deduction simultaneously.

Two scenarios allow this dual benefit:

• The property you own and the rented house are in the same city, but you need to provide an explanation for not living in your own house. Exemption is possible if you rent a house because your owned property is far from your workplace.
• You reside in a different city for job purposes but have purchased a house property in another city.

This allows salaried employees to maximize tax savings while managing both rental expenses and home loan obligations.

Section 80GG of the Income Tax Act allows taxpayers without HRA component in their salary but paying rent to claim a deduction against rental expenses incurred. This section is designed for self-employed individuals and employees who do not receive HRA from their employer.

The deduction under Section 80GG is calculated as the lowest of 3 amounts:

1. Rs. 5,000 per month or Rs. 60,000 per year
2. 25% of the total income before allowing deduction under this section
3. Actual rent paid less 10% of income before allowing deduction under this section

Section 80GG deduction is available only under the old tax regime and not under the new tax regime. Employees who do not receive salary income can also claim deduction under Section 80GG.

For example, if you are self-employed and earn Rs. 6 lakhs per year while paying annual rent of Rs. 1.2 lakhs, the exemption will be the least of Rs. 60,000 (the maximum limit), Rs. 1.5 lakhs (25% of gross annual earnings), or Rs. 60,000 (actual rent paid of Rs. 1.2 lakhs minus Rs. 60,000, which is 10% of gross earnings). Therefore, Rs. 60,000 becomes your deduction for rent for the financial year.

HRA treatment differs significantly between the 2 tax regimes:

Old Tax Regime vs. New Tax Regime

It is recommended to opt for the old regime if there is significant rent outflow and resultant HRA exemption, along with other tax-saving deductions. If there is limited HRA exemption available due to less rent outflow and fewer tax-saving deductions, the new regime is often beneficial due to its relaxed slab rates.

To claim HRA exemption when filing your Income Tax Return, follow 7 steps:

1. Visit the Income Tax Department's official website and download ITR-1
2. Share the detailed breakup of your salary in the relevant field
3. Provide your basic salary without adding any allowances, then include all non-exempt allowances
4. Calculate the HRA eligible for exemption and mention it
5. Click on 'Taxes Paid and Verification'
6. Share the details of exempt income
7. Follow the instructions on the website to complete the ITR filing

To be able to claim an exemption for the HRA component, it is important for you to file your ITR within the specified due date. The exemption should be clearly shown in the ITR form. Make sure to provide proof to HR to reduce monthly TDS.

The New Income Tax Rules, 2026 introduced 2 key changes for HRA exemption. First, it makes it mandatory to disclose the relationship between the landlord and tenant for claiming HRA benefit. Second, the 50% HRA exemption has been extended to include 4 additional cities: Hyderabad, Pune, Ahmedabad, and Bengaluru, bringing the total to 8 cities eligible for 50% HRA exemption.

The Income Tax Act 2025 corresponds to Section 11 read with Schedule III for house rent allowance exemptions, replacing the previous Section 10(13A) from the Income Tax Act 1961. For rent deduction for self-employed or those without HRA, Section 84 replaces the previous Section 80GG.