The three-way least-of test
Section 10(13A) of the Income Tax Act does not exempt your whole HRA. It exempts the lowest of three separate figures, computed annually:
1. Actual HRA received
2. Rent paid − 10% of basic salary
3. 50% of basic salary (metro) or 40% (non-metro)
- Basic
- Basic pay + DA, if DA forms part of retirement benefits
- Metro
- Only Delhi, Mumbai, Kolkata and Chennai
The second condition is the one that usually binds. It means that if your rent is less than 10% of your basic salary, you get no exemption at all — the logic being that you are not really bearing a housing cost.
A worked example
The remaining ₹1,20,000 of HRA is added to taxable salary. At the 30% slab the exemption saves about ₹56,160 including cess.
The same package in Pune
Condition 3 becomes 40% of basic = ₹2,40,000. Conditions 1 and 2 are unchanged, so the least is still ₹1,80,000. The metro classification only matters when condition 3 would otherwise be the binding constraint — typically when rent is high relative to basic.
What you need to claim it
- Rent receipts for the period claimed. Employers usually require them quarterly.
- Landlord's PAN if your annual rent exceeds ₹1,00,000. Without it the claim can be disallowed.
- A rent agreement — not strictly mandatory but the first thing asked for in any scrutiny.
- Proof of payment. Bank transfers are far safer than cash. Assessing officers increasingly disallow cash-only claims.
Renting from a relative
This is permitted and upheld by tribunals, but it must be a genuine arrangement: an actual agreement, rent actually transferred, and the landlord declaring the rental income in their return. Paying "rent" to a parent you live with, with no money moving, is a well-known audit trigger.
If your employer does not pay HRA
You cannot claim under Section 10(13A), which requires HRA to be part of your salary. Instead, Section 80GG allows a deduction of the least of ₹5,000 a month, 25% of total income, or rent minus 10% of total income. It also requires that you, your spouse and minor children own no residential property in the city where you work.
Frequently asked questions
How is HRA exemption calculated?
It is the least of three amounts: actual HRA received, rent paid minus 10% of basic salary, and 50% of basic for metro cities or 40% for non-metro.
The second condition binds most often. If your rent is below 10% of basic, the exemption is zero.
Which cities count as metro for HRA?
Only Delhi, Mumbai, Kolkata and Chennai. This is a specific statutory definition and has not been updated despite the growth of other cities.
Bengaluru, Hyderabad, Pune, Ahmedabad and Gurugram are all treated as non-metro, capped at 40% of basic.
Can I claim HRA and a home loan deduction together?
Yes, and it is legitimate in several situations: your owned property is in a different city from where you work, it is genuinely let out, or it is under construction and you are renting meanwhile.
Claiming both while living in your own property in the same city will not survive scrutiny.
Can I pay rent to my parents and claim HRA?
Yes, if the arrangement is genuine. The property must be owned by them, not you; rent must actually be transferred, ideally by bank transfer; and they must declare it as rental income in their return.
Where the parent is in a lower tax bracket, this can be efficient overall. Where no money actually moves, it is a disallowance waiting to happen.
Do I need my landlord's PAN?
Yes, if your annual rent exceeds ₹1,00,000 — roughly ₹8,333 a month. Your employer will require it to allow the exemption at source, and claims without it are frequently disallowed.
If the landlord genuinely has no PAN, a signed declaration with their address is the fallback, though it carries more risk.
Is HRA available under the new tax regime?
No. Section 10(13A) is one of the exemptions removed under the new regime, which is now the default from FY 2023-24.
If your HRA exemption is substantial, run both regimes before choosing. For many salaried renters in expensive cities, the old regime still comes out ahead.