How to Calculate HRA Exemption for FY 2025-26: A Practical Guide

HRA is one of the biggest tax-saving levers a salaried person has, and yet a surprising number of people either miss it entirely or work it out wrong. The rules are not hard, they are just easy to get backwards. So let us walk through how to calculate your House Rent Allowance exemption for the FY 2025-26 return, the one due by 31 July 2026, with real numbers you can follow. No accountant-speak, just the maths and where people trip up.

What is HRA and who can claim it

HRA, or House Rent Allowance, is a salary component meant to cover your rent. Under Section 10(13A) of the Income Tax Act, part of it can be exempt from tax if you actually live in rented accommodation. Three conditions decide how much. To claim it at all you need to tick a few boxes: you must genuinely pay rent, you must live in that rented home, and your salary must include an HRA component. There is one more rule that catches people out. HRA exemption is available only under the old tax regime. Pick the new regime and the exemption vanishes, no matter how much rent you pay.

The three-condition formula

Here is the whole calculation in one place. Your exempt HRA is the lowest of these three figures:

• The actual HRA you received from your employer.
• Rent you paid, minus 10% of your (Basic + DA).
• 50% of (Basic + DA) if you live in a metro city, or 40% of (Basic + DA) if you live anywhere else.

Read that again, because it is the single most common mistake. You claim the minimum of the three, not the maximum. The lowest number wins. Whatever is left over after subtracting the exempt amount from your total HRA is taxable. Our HRA calculator runs all three conditions for you, but it helps to understand what it is doing.

Metro vs non-metro, and why it matters

That third condition swings on one word: metro. For the FY 2025-26 return, only four cities count as metro and get the 50% figure: Delhi, Mumbai, Kolkata and Chennai. Everywhere else is non-metro and uses 40%. That includes some very expensive places.

Yes, even if you are paying ₹40,000 a month in Bangalore, it is still 40% for this year's filing. The same goes for Hyderabad, Pune, Ahmedabad and every other city outside the original four. When in doubt, treat your city as non-metro unless it is one of those four.

From FY 2026-27 (April 1, 2026 onwards), the Income Tax Rules 2026 have expanded the metro city list from four to eight cities. Bangalore, Hyderabad, Pune and Ahmedabad now qualify for the 50% HRA exemption rate alongside Delhi, Mumbai, Kolkata and Chennai.

Important: For your FY 2025-26 ITR (due 31 July 2026), the old four-city rule still applies. The eight-city expansion only applies from FY 2026-27 onwards.

A full worked example

Numbers make this click. Take a software engineer in Bangalore with these monthly figures:

• Basic salary: ₹50,000
• Dearness Allowance (DA): ₹5,000
• HRA received: ₹20,000
• Rent paid: ₹18,000

Annualised, that gives Basic + DA of ₹6,60,000, HRA received of ₹2,40,000, and rent paid of ₹2,16,000. Now run the three conditions:

• Condition 1 (actual HRA): ₹2,40,000.
• Condition 2 (rent minus 10% of Basic+DA): ₹2,16,000 minus ₹66,000 = ₹1,50,000.
• Condition 3 (40% of Basic+DA, since Bangalore is non-metro): ₹2,64,000.

The exempt HRA is the lowest of the three, which is ₹1,50,000. So out of the ₹2,40,000 of HRA this engineer received, ₹1,50,000 is tax-free and the remaining ₹90,000 is taxable. Plug your own salary and rent into the HRA calculator and you will see the same three conditions resolved instantly.

Can you pay rent to your parents?

You can, and it is perfectly legal when it is real. If you live with your parents in a home they own, you can pay them rent and claim HRA on it. The catch is that it has to be a genuine arrangement, not a paper one. To stay on the right side of the rules:

• Have a proper rent agreement in place.
• Actually transfer the rent every month, ideally by bank transfer so there is a trail.
• If annual rent crosses ₹1,00,000, report your parent's PAN.
• Your parent must declare that money as rental income in their return.

Done properly this can genuinely cut the family's combined tax, especially if your parents are retired and sit in a lower slab or below the taxable limit. They can also claim a standard 30% deduction on the rental income. The saving is real, but only if the money truly changes hands.

Documentation you need to keep

Claiming HRA is not just about the calculation, it is about being able to back it up. Hold on to these:

• Monthly rent receipts for the full year.
• A copy of the rent agreement.
• Proof of payment, such as bank statements showing the transfers.
• Your landlord's PAN if the annual rent is above ₹1,00,000.

Salaried employees usually declare all of this to their employer through Form 124 (which replaced Form 12BB from April 2026) for investment declarations including HRA, so the right tax is deducted at source. Keep your own copies too, because the burden of proof sits with you if the claim is ever questioned.

Note: Form 12BB has been replaced by Form 124 under the new Income Tax Rules effective April 2026. Check with your employer for the updated declaration form.

New regime versus old regime for HRA

This is the decision that quietly matters most. If you choose the new tax regime, your HRA exemption is gone, even if you pay ₹50,000 a month in rent. The new regime trades away exemptions for lower slab rates. So the question is never just "which regime has lower rates", it is "does my HRA exemption save me more than the new regime's lower rates would".

A quick way to see it: if your HRA exemption alone saves you, say, ₹45,000 in tax, the old regime can easily come out ahead despite its higher rates. The honest answer is to run both and compare. Our salary and tax calculator does exactly that, putting your liability under both regimes side by side so the cheaper one is obvious. If you want to go deeper on that choice, our guide on the new versus old tax regime breaks down who wins in each case. And while you are optimising the old regime, do not forget the extra ₹50,000 deduction for NPS under Section 80CCD(1B), which stacks on top of your 80C limit.

Common mistakes to avoid

• Using 50% in a non-metro city. If you are not in Delhi, Mumbai, Kolkata or Chennai, you use 40%, full stop.
• Claiming the highest of the three conditions. It is always the lowest. This single error inflates many wrong claims.
• No rent receipts or PAN. If your rent is above ₹1,00,000 a year and you have no landlord PAN on file, the claim can be denied.
• Claiming HRA with no real rent paid. A salary HRA component does not mean automatic exemption. You must actually be paying rent.
• Forgetting it dies in the new regime. Choosing the new regime out of habit can cost a high-rent tenant a lot.

HRA is genuinely worth getting right, because for a renter in a big city it is often the single largest exemption on the return. Work out the three conditions, keep your paperwork tidy, and compare both regimes before you commit. The HRA calculator handles the maths, and your numbers never leave your browser.

This is general information, not tax advice. Rules and city classifications can change. Confirm your position with a qualified chartered accountant or the official income tax portal before filing.