How it's calculated
If you live in a rented house and your salary includes a house rent allowance (HRA), part of the HRA is exempt from tax under the old regime. Rule 279 of the Income-tax Rules, 2026 sets the limit as the lowest of three amounts, each for the months you rented.Income Tax Department
The formula
Tax-free HRA = the lowest of:
- the HRA you received;
- rent paid − 10% of salary;
- 50% of salary if the house is in Mumbai, Kolkata, Delhi, Chennai, Hyderabad, Pune, Ahmedabad or Bengaluru, 40% anywhere else.
Salary means basic pay plus dearness allowance where your terms of employment count it for retirement benefits. Commission and other allowances are not part of it. Taxable HRA = HRA received − tax-free HRA, and it is added to your taxable salary.
The new Rules added Hyderabad, Pune, Ahmedabad and Bengaluru to the four cities that previously qualified for the 50% limit.
Worked example
With a basic salary of ₹50,000, HRA of ₹25,000 and rent of ₹25,000 a month in Mumbai, the three limits for the year are ₹3,00,000 of HRA received, ₹2,40,000 of rent above 10% of salary, and ₹3,00,000 as 50% of salary. The tax-free HRA is ₹2,40,000, and ₹60,000 is taxable.
| Line | Amount |
|---|---|
| 1. HRA received | ₹3,00,000 |
| 2. Rent paid − 10% of salary | ₹2,40,000 |
| 3. 50% of salary (Mumbai) | ₹3,00,000 |
| Tax-free HRA | ₹2,40,000 |
| Taxable HRA (added to salary) | ₹60,000 |
In a city outside the list, with a rent of ₹30,000 a month, the 40% limit applies and the tax-free HRA is ₹2,40,000.
Assumptions and limitations
- Old regime only. Under the new regime, HRA is fully taxable. The income tax calculator tells you which regime is better once you know your HRA exemption.
- Same salary, HRA and rent every month you rented. If they changed during the year, work out each period separately and add them.
- The city is where the rented house is, not where your office is.