House Rent Allowance (HRA)

This entry describes the position under the Income-tax Act, 1961. That Act was repealed with effect from 1 April 2026, and it is worth being precise about what that does and does not change, because the two statutes overlap.

Section 536(2) of the Income-tax Act, 2025 continues the repealed Act for any tax year beginning before 1 April 2026. The Finance Act, 2026 then charges income-tax for the assessment year commencing 1 April 2026 under the Income-tax Act, 1961, at the rates in Part I-A of its First Schedule. So for income of the financial year 2025-26 and earlier, the rules set out below are the governing rules, not history.

What is unresolved is the position from tax year 2026-27 onward. The successor provision has not been located in the Income-tax Act, 2025 or the Income-tax Rules, 2026, and this entry does not guess at one. Anyone structuring pay for 2026-27 should establish the current position from the 2025 Act directly rather than carrying the figures below forward.

House rent allowance is a component of salary paid to an employee who lives in rented accommodation. It sits in the salary structure alongside basic pay, and it is paid every month whether or not the employee produces anything to justify it.

What makes it worth structuring is that a part of it escapes tax. Section 10(13A) exempts so much of the allowance as is spent on rent, subject to limits, and Rule 2A sets those limits. The consequence for payroll is that HRA is neither fully taxable like a special allowance nor fully exempt like a reimbursement of actual expenditure. It is partly exempt, and the split has to be computed for each employee.

The single most common misunderstanding is that HRA is exempt because it is called HRA. An employee who lives in a house they own, or with family and pays no rent, is taxed on the whole of it. The label on the payslip does nothing on its own.

Rule 2A prescribes three figures. The exemption is the lowest of the three, and the rest of the allowance is taxable salary.

• The house rent allowance actually received for the period.
• Rent actually paid, minus ten percent of salary for the period.
• Fifty percent of salary if the accommodation is in Delhi, Mumbai, Kolkata or Chennai, and forty percent elsewhere.

Take an employee in Delhi with basic pay of 50,000 rupees a month and no dearness allowance, receiving HRA of 20,000 a month, paying rent of 20,000 a month for the full year. Annual salary for this purpose is 6,00,000, HRA received is 2,40,000, and rent paid is 2,40,000.

So 1,80,000 is exempt and 60,000 is added to taxable salary. Notice which limb decided it. If the same employee moved to a house at 40,000 a month, the second limb rises to 4,20,000 and the first limb becomes the binding one, so the exemption stops at 2,40,000 and paying more rent buys nothing further. The exemption can never exceed the allowance the employer actually pays.

The calculation is done for the period the conditions hold rather than once for the year. An employee who moves from Pune to Mumbai in October, or whose rent rises in September, has two periods to compute and add together.

Salary here is a defined term, and it is much narrower than gross pay or cost to company. It means basic pay, plus dearness allowance where the terms of employment provide that it enters retirement benefits, plus commission based on a fixed percentage of turnover. Special allowance, conveyance, bonus, other allowances and employer contributions are all outside it.

Paying a low basic and a large special allowance therefore shrinks two of the three limbs at once, which is why a salary structure designed only around take-home can quietly reduce the exemption an employee is able to claim.

For the fifty percent limb, only Delhi, Mumbai, Kolkata and Chennai qualify. Bengaluru, Hyderabad, Pune and Gurugram do not, whatever their rents look like, and whatever an internal city tier list says. Payroll systems that classify cities for location allowance should not reuse that classification here.

The employer allowing the exemption in payroll has to hold evidence for it, which is collected with the employee's declaration in Form 12BB.

• Rent receipts for the period claimed, and usually the rent agreement.
• The landlord's name and address.
• The landlord's PAN, where annual rent crosses the threshold notified under Rule 26C. Confirm the current threshold before relying on it.
• Where the landlord is a non-resident, tax has to be deducted on the rent by the tenant, which is the employee's obligation rather than the employer's.

Rent paid to a parent or a spouse is a recurring question. Rent to a genuine landlord who happens to be a relative is allowable, provided the arrangement is real: the relative owns the property, the money actually moves, and the rent is reported as their income. Rent to a spouse for a shared home, or a paper arrangement with no payment, has been disallowed on assessment. Payroll is not the right place to adjudicate this, so the safe practice is to collect the same evidence as for any other landlord and let the employee carry the position.

Where the employee cannot produce the PAN and the rent is above the threshold, the exemption cannot be allowed through payroll. That is a hard stop, not a matter of discretion.

No. The regime with lower slab rates withdraws the Section 10(13A) exemption, along with most other exemptions and deductions. Since that regime applies by default where the employee records no choice, an employee who submits rent receipts but never confirms a regime can find the whole allowance taxed.

This makes the regime choice and the HRA claim a single decision rather than two. For an employee paying substantial rent in a metro, the exemption can be large enough to make the higher-rate regime cheaper overall, and that comparison should be run on the employee's own figures rather than assumed either way.

An employee who pays rent but receives no HRA at all is on a different track. Section 80GG allows a deduction in that case, subject to its own much lower limits and conditions, and it too is unavailable under the default regime.

HRA generates more year-end corrections than any other salary component, and the causes repeat.

• The exemption is computed on gross salary or on cost to company rather than on basic plus qualifying dearness allowance, which overstates it.
• A city is classified as a metro because it is a large city, giving fifty percent where forty applies.
• Rent declared in April is never proven in January, so the exemption is reversed and the shortfall lands on the last two payslips.
• An employee stops paying rent mid-year, moves into an owned house, and does not tell payroll, so the exemption keeps running.
• The employee is on the default regime and the exemption was applied anyway.

Each of these produces the same visible symptom, which is a large unexplained deduction late in the year. Recomputing HRA period by period at every proof checkpoint, rather than once in April, is what keeps that from happening.

The provision has moved and the numbers have changed with it. House rent allowance is now exempt under Schedule III, Table Serial Number 11 of the Income-tax Act, 2025, the successor to section 10(13A) of the repealed Act. Four conditions sit in the Schedule itself: the allowance must be specifically granted to meet expenditure actually incurred on payment of rent, by whatever name called, for residential accommodation occupied by the assessee; the accommodation must not be owned by the assessee; the assessee must actually have incurred the rent; and the exempt extent is whatever is prescribed, having regard to the area or place in which the accommodation is situated.

Rule 279 of the Income-tax Rules, 2026 prescribes it, and it is the successor to the old rule 2A. The exemption is the LEAST of three amounts: the actual allowance received for the relevant period; the amount by which rent actually paid exceeds one-tenth of salary due for the relevant period; or a percentage of salary fixed by location.

That table is the change most likely to be missed, and it moves money. Under the old regime the 50% band was the four metros: Mumbai, Kolkata, Delhi and Chennai. Rule 279 adds Hyderabad, Pune, Ahmedabad and Bengaluru. An employer running payroll from a 1961-regime configuration will be applying 40% to employees in four large cities who are now entitled to have 50% used in the comparison, and the error runs the way that costs the employee.

Two definitions in the rule decide the arithmetic. The relevant period is the period during which the accommodation was occupied during the tax year, so a mid-year move is computed in parts rather than annually. Salary for this purpose includes dearness allowance if the terms of employment provide for it, and excludes all other allowances and perquisites, so the base is narrower than gross pay and narrower than most payroll systems default to.