Guide
House rent allowance: the three-way test that decides what is tax-free
House Rent Allowance is a component of many salaries, paid on top of basic pay to help with rent. Part of it can be exempt from income tax if you actually pay rent, and the amount of the exemption is decided by a rule with three tests, of which the smallest wins. This page applies the rule so that you can see what is exempt, why, and what might change it, such as a higher rent or a different city class.
The three tests
The exemption is the least of: (1) the HRA you receive from your employer during the period; (2) the rent you pay minus 10 percent of your salary; (3) 50 percent of your salary if you live in a metro city, or 40 percent of your salary if you do not. Salary means basic pay plus dearness allowance that counts for retirement benefits, and sometimes a commission that is a fixed share of turnover. It does not include other allowances. If the least amount is negative or zero, no exemption is available.
A worked example
The default is a basic pay of 50,000 a month, an HRA of 22,000 and a rent of 24,000, over 12 months in a metro city. The salary for the period is 6,00,000, the HRA received 2,64,000, the rent paid minus 10% of the salary is 2,88,000 − 60,000 = 2,28,000, and 50% of salary is 3,00,000. The least is 2,28,000, set by the rent test, so 19,000 a month is exempt and 36,000 of the HRA is taxable. In the second example, a basic pay of 60,000, HRA of 20,000, a rent of only 6,000 and the 40% rule: the rent test gives 72,000 − 72,000 = 0, so nothing is exempt and all 2,40,000 of HRA is taxable.
Why a low rent matters
The second test subtracts a tenth of your salary from the rent. If your rent is not much more than that, the test gives a small or zero figure, and it limits the exemption however large the HRA is. This is why people with a high HRA and a low rent pay tax on much of it. Paying more rent, if you really do, raises the exemption until one of the other two tests becomes the smallest.
Metro and non-metro
The 50 percent rule applies to a list of metro cities, which traditionally has been Delhi, Mumbai, Kolkata and Chennai. The list has been under review and may change, so the page does not decide for you: you choose between the 50 percent and the 40 percent rule. Check the current definition of a metro city for your tax year before you choose. The choice only matters when the third test is the smallest.
Rent receipts and PAN
Your employer will want proof that you pay rent, usually receipts and the landlord’s details. If your total rent for the year is more than 1,00,000, the landlord’s PAN is required. If you pay no rent, or your salary has no HRA, you may be able to claim a deduction under section 80GG instead, with different rules. The page covers only the HRA exemption.
Edge cases
The months field is 1 to 12 and sets how many months of pay, HRA and rent are counted. A rent of zero gives no exemption. If HRA is zero, there is nothing to exempt. The DA field is optional and defaults to zero. All amounts are monthly.
Limits
The exemption exists under the old regime only. In the new regime HRA is fully taxable, with no relief. The page does not check that rent has been paid, that the landlord reports it or other conditions. Use the result to understand your payslip, not as tax advice.
Related tools
- Income Tax Calculator takes the HRA exemption as an input and compares the two regimes.
- CTC to In-Hand Calculator shows where HRA sits in a salary structure.
- 80C Tax Calculator covers the other deductions available under the old regime.
- Salary Calculator converts pay between yearly, monthly and hourly figures.
Checked against the current version of the HRA Exemption Calculator on .