An HRA exemption calculation is really three calculations and a comparison. The Income-tax Act lists three limits and only the lowest is exempt, so an exam answer has to show all three before picking one. This post covers the formula, the definition of salary that trips most students up, and two solved numericals for FY 2025-26 (AY 2026-27) under the Income-tax Act, 1961. The figures come from our HRA exemption calculator.
The HRA exemption is available only under the old tax regime. The e-filing portal’s FAQs on the new and old tax regimes state that the section 10(13A) exemption is not available in the new tax regime under section 115BAC, and the ITR-1 validation rules for AY 2026-27 require exempt HRA to be zero when the new regime is selected. Both examples below assume the employee has opted for the old regime.
The rule under section 10(13A) and Rule 2A
The Income Tax Department’s page on income from salary lists house rent allowance under section 10(13A) read with Rule 2A. The least of the following is exempt: actual HRA received; 40% of salary, or 50% if the house is in Mumbai, Calcutta (Kolkata), Delhi or Chennai; and rent paid minus 10% of salary.
The same page defines salary for this purpose as basic salary, plus dearness allowance if it forms part of retirement benefits, plus turnover-based commission. It adds two notes: HRA is fully taxable if the employee lives in their own house or pays no rent, and the employee must report the landlord’s PAN to the employer if rent paid is more than ₹1,00,000.
In the examples below, rent is paid and HRA is received for the whole year, so annual figures are used throughout.
HRA exemption formula: least of three limits
Calculate each limit for the year, then take the smallest. Whatever HRA is left over is added to taxable salary.
HRA exemption under Rule 2A
Exempt HRA = MIN( Actual HRA , Rent paid − 10% × Salary , 50% or 40% × Salary )
Salary = Basic + DA (retirement benefits) + Turnover-based commission
Taxable HRA = HRA received − Exempt HRA
Solved numericals
Example 1: non-metro city (Bengaluru)
Question: Mr D works in Bengaluru. His monthly pay is: basic ₹40,000, DA ₹10,000 (forming part of retirement benefits) and HRA ₹18,000. He pays rent of ₹22,000 a month for the whole of FY 2025-26 and has opted for the old tax regime. Calculate his exempt and taxable HRA.
Solution:
- Salary for HRA = (₹40,000 + ₹10,000) × 12 = ₹6,00,000. DA counts because it forms part of retirement benefits.
- Limit 1, actual HRA received = ₹18,000 × 12 = ₹2,16,000.
- Limit 2, rent paid − 10% of salary = ₹2,64,000 − ₹60,000 = ₹2,04,000.
- Limit 3, Bengaluru is not one of the four cities, so 40% of salary = 40% × ₹6,00,000 = ₹2,40,000.
- The least of the three is limit 2, ₹2,04,000.
Answer: Exempt HRA = ₹2,04,000. Taxable HRA = ₹2,16,000 − ₹2,04,000 = ₹12,000.
| Limit | Amount |
|---|---|
| 1. Actual HRA received | ₹2,16,000 |
| 2. Rent paid − 10% of salary | ₹2,04,000 |
| 3. 40% of salary | ₹2,40,000 |
| Exempt HRA (least of 1–3) | ₹2,04,000 |
| Taxable HRA | ₹12,000 |
Example 2: metro city with DA outside retirement benefits
Question: Ms E lives and works in Mumbai. Her monthly pay is: basic ₹50,000, DA ₹5,000 (not forming part of retirement benefits) and HRA ₹30,000. Her rent is ₹25,000 a month for the whole year. She has opted for the old tax regime. Calculate her exempt and taxable HRA for FY 2025-26.
Solution:
- Salary for HRA = ₹50,000 × 12 = ₹6,00,000. Her DA does not form part of retirement benefits, so it is left out.
- Limit 1, actual HRA received = ₹30,000 × 12 = ₹3,60,000.
- Limit 2, rent paid − 10% of salary = ₹3,00,000 − ₹60,000 = ₹2,40,000.
- Limit 3, Mumbai is one of the four cities, so 50% of salary = ₹3,00,000.
- The least of the three is limit 2, ₹2,40,000.
Answer: Exempt HRA = ₹2,40,000. Taxable HRA = ₹3,60,000 − ₹2,40,000 = ₹1,20,000.
| Limit | Amount |
|---|---|
| 1. Actual HRA received | ₹3,60,000 |
| 2. Rent paid − 10% of salary | ₹2,40,000 |
| 3. 50% of salary | ₹3,00,000 |
| Exempt HRA (least of 1–3) | ₹2,40,000 |
| Taxable HRA | ₹1,20,000 |
In both examples the rent limit decides the answer. This happens whenever rent paid is low compared with the HRA the employer pays. In Example 2, Ms E would need to pay more rent, not receive more HRA, to raise her exemption: each extra rupee of rent raises limit 2 by a rupee until it reaches limit 3 at ₹3,00,000.
What changes the answer
Go back to Mr D in Example 1 and raise his rent to ₹25,000 a month. Limit 2 becomes ₹2,40,000, equal to limit 3, and both are now above his actual HRA of ₹2,16,000. The least of the three is the HRA received, so the exemption becomes ₹2,16,000 and taxable HRA falls to ₹0. Once actual HRA is the lowest limit, paying more rent does not increase the exemption.
A pay rise works the other way. A higher basic or qualifying DA increases 10% of salary, which reduces limit 2, while it raises limit 3. Whenever salary changes during an exam question, recalculate all three limits rather than adjusting only one.
Common mistakes students make
- Using basic pay alone as salary when the question says DA forms part of retirement benefits.
- Including DA that does not form part of retirement benefits, which inflates limits 2 and 3.
- Treating Bengaluru, Hyderabad or Pune as 50% cities for FY 2025-26 (they qualify only from tax year 2026-27).
- Deducting 10% of HRA, or 10% of rent, instead of 10% of salary in limit 2.
- Mixing monthly and annual figures across the three limits.
- Claiming the exemption under the new tax regime, where section 115BAC does not allow it.
Check your answer
Enter annual salary (basic plus qualifying DA), HRA received and rent paid in the HRA calculator, and choose metro or non-metro. It shows each limit next to the exemption, which is the layout examiners expect. The exemption counts only if you file under the old regime, so compare the two before relying on the saving; our old vs new tax regime comparison walks through that decision.
This is an educational example for FY 2025-26. From tax year 2026-27 the Income-tax Act, 2025 applies, and section and rule numbers may differ, so confirm the current provisions on the Income Tax Department’s website.
Last updated: 23 October 2026