HRA Exemption Calculation 2026: The Least-of-Three Rule Explained With a Worked Example

By Nitish Bharadwaj · Published Sep 16, 2026 · 6 min

HRA exemption under Section 10(13A) equals the smallest of three amounts: actual HRA received, rent paid minus 10% of salary, and 50% of salary for a metro city (40% elsewhere) — where 'salary' means basic plus DA, not gross pay, a distinction that trips up most first-time calculations. This guide works through a full numeric example, covers why the calculation must be redone separately for each period a salary or rent changes mid-year, when a landlord's PAN becomes mandatory on the claim, and confirms the exemption survives only under the old tax regime.

Most salaried employees know HRA saves tax, but ask them to actually calculate the exemption and the answer is usually a guess. The formula isn't complicated once laid out — it's the least of three fixed amounts — but two of the three routinely get computed wrong, either off the wrong salary figure or without adjusting for a mid-year rent or salary change. Here's the exact method, worked through with real numbers.

The Formula: Exemption Is the Least of Three Amounts

Section 10(13A) exempts House Rent Allowance from tax up to the smallest of three separately computed figures: the actual HRA received from the employer during the period; rent paid minus 10% of salary; and 50% of salary for a metro city or 40% for a non-metro city. Whichever of the three produces the lowest number is the exemption you're entitled to — the other two amounts are simply irrelevant once the smallest is identified. Everything above that exempted figure, out of the HRA actually received, is added back to taxable salary.

Which Cities Get the 50% Rate

Delhi, Mumbai, Kolkata, and Chennai have long qualified for the higher 50%-of-salary limit as declared metros; every other city uses 40%. From FY 2026-27, Bengaluru, Hyderabad, Pune, and Ahmedabad join the 50% list as well, under the Income-tax Rules, 2026 — our dedicated guide to the 8-city HRA expansion covers exactly when that change takes effect and how much of a difference it makes in practice, since the 50%-vs-40% figure only matters when it's the smallest of the three amounts to begin with.

Worked Example: A Full Calculation, Step by Step

Take a salaried employee in Mumbai (a metro city) with basic salary plus DA of ₹6,00,000 a year, HRA of ₹3,00,000 a year actually received, and annual rent paid of ₹2,40,000.

Here, the binding constraint is the rent-minus-10%-of-salary figure, not the metro rate — a pattern that holds for most salaried employees whose rent, relative to their basic salary, isn't unusually high. The remaining ₹1,20,000 of HRA received gets added to taxable salary exactly as if no exemption existed for that portion.

The Paperwork: Rent Receipts and Landlord PAN

Employers generally accept HRA claims without landlord PAN when annual rent is below ₹1,00,000, but above that threshold, the landlord's PAN is mandatory on the declaration — a missing PAN above this level is one of the most common reasons an employer disallows an HRA claim at the payroll stage, forcing the employee to claim it directly while filing the ITR instead. A landlord without a PAN can instead furnish a signed declaration to that effect, though employers vary in how readily they accept it.

If You Don't Get HRA at All

This entire calculation only applies to a salaried employee who receives a distinct HRA component in their salary structure. Self-employed individuals, freelancers, and salaried employees whose CTC has no HRA line item can't use Section 10(13A) at all — but aren't necessarily locked out of a rent deduction. Our Section 80GG guide covers the separate, capped deduction available specifically for rent paid without any HRA component, under a different set of conditions and a much lower ceiling.

And one condition sits above all three parts of the formula: HRA exemption under Section 10(13A) is available only under the old tax regime. The new tax regime — the default since FY 2025-26 — disallows it entirely, regardless of how the least-of-three calculation works out. Our HRA under the new tax regime guide covers what that means for deciding which regime actually leaves you better off once a large HRA exemption is in the mix.