House Rent Allowance is often the biggest deduction for salaried people in cities - but only in the old regime.
The formula
The exempt HRA is the least of:
- Actual HRA received,
- Rent paid minus 10% of basic salary (basic + DA),
- 50% of basic if you live in Delhi, Mumbai, Kolkata or Chennai; 40% elsewhere.
Example: basic ₹6 lakh, HRA ₹2.4 lakh, rent ₹2.64 lakh (₹22,000 a month) in Pune:
- Actual HRA: ₹2,40,000
- Rent − 10% basic: ₹2,64,000 − ₹60,000 = ₹2,04,000
- 40% of basic: ₹2,40,000 → Exempt HRA = ₹2,04,000.
Bengaluru, Hyderabad and Pune are non-metro for this rule (40%), even though they're big cities.
Proof
- Rent receipts or the rent agreement, submitted to your employer.
- Landlord's PAN if annual rent exceeds ₹1 lakh (₹8,334 a month).
- Pay by bank transfer where you can - it's the best evidence.
Paying rent to parents
Allowed if your parents own the house and you genuinely pay them rent. They must show it as income in their return. It's a common and legitimate way to save tax when the parent is in a lower slab.
Common mistakes
- Claiming HRA while living in your own house in the same city.
- Claiming HRA and the home loan interest deduction on the same house you live in (both are possible only in specific situations, e.g. you own a house in another city).
- Fake receipts - the income tax department cross-checks landlord PANs.
Calculate your HRA exemption and see whether it makes the old regime worth it for you.