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& Guide 2026

The three-formula test, all 8 eligible cities, the place-of-employment condition, and a documentation checklist — everything Rule 279 changed on 1 April 2026.

Tax Year 2026-27 · Rule 279, Income-tax Rules 2026 · Last updated 21 August 2026

House Rent Allowance exemption is one of the largest available deductions for salaried employees — but it only works in the old tax regime, and the calculation is more involved than most payslips suggest. Three separate amounts are computed, and you can only claim the smallest. The 2026 Rules expanded the 50% city list from 4 to 8, and added a condition most summaries miss.

The three-formula test — how HRA exemption is computed

HRA exemption under Section 10(13A) of the Income-tax Act (renumbered under the 2025 Act) is the minimum of three amounts. Claiming any one of them without testing the others is wrong.

Formula A
Actual HRA received from employer
Formula B
Rent paid − 10% of basic salary
Formula C
50% of basic (metro cities)
40% of basic (all others)

Basic salary here means only the basic component — not DA, not HRA, not special allowances. This is a common source of error. If your CTC structure uses "basic + DA" as a combined line, only the basic portion counts.

A worked example — ₹24L CTC in Bengaluru

Basic salary ₹12,00,000 (50% of CTC). Monthly rent paid ₹25,000 (₹3,00,000/year). HRA received from employer: assume 40% of basic = ₹4,80,000/year (a common structural estimate — override with your actual payslip figure).

  • Formula A: HRA received = ₹4,80,000
  • Formula B: Rent paid (₹3,00,000) − 10% of basic (₹1,20,000) = ₹1,80,000
  • Formula C: 50% of basic (Bengaluru is now a 50% city) = ₹6,00,000
  • Exemption = minimum of A, B, C = ₹1,80,000

Formula B is the binding constraint here because the monthly rent (₹25,000) is moderate relative to basic. To maximize the exemption, rent would need to rise to roughly ₹65,000/month before Formula C becomes binding.

HRA Exemption Calculator
HRA Exemption — Three Formula Test
Formula A: HRA received
Formula B: Rent − 10% of basic
Formula C: City rate × basic
HRA Exemption (minimum)
Taxable HRA (HRA received − exemption)

The 8 cities that qualify for 50% HRA — and the new condition

Under Rule 279 of the Income-tax Rules, 2026 (notified 20 March 2026, in force from 1 April 2026), the following eight cities now qualify for the 50% rate:

Mumbai50% — unchanged
Delhi50% — unchanged
Kolkata50% — unchanged
Chennai50% — unchanged
Bengaluru50% — added 2026
Hyderabad50% — added 2026
Pune50% — added 2026
Ahmedabad50% — added 2026

Every other location — Noida, Gurugram, Navi Mumbai, Thane, Kochi, Chandigarh, Jaipur, and all tier-2 and tier-3 cities — remains at 40% of basic.

The place-of-employment condition — the most overlooked change

Rule 279 also introduced (or clarified) a condition that tax practitioners have flagged as significant: the rented accommodation must be at the employee's place of employment. This affects anyone who maintains a home in City A but is employed in City B — a common situation for people with family in one city and a work posting in another.

The practical implication: if you work in Bengaluru but your family home (which you pay rent for) is in Hyderabad, you cannot claim HRA exemption on that rent. The rent must be in the city where you are actually employed. Claiming HRA on rent paid in a different city from your workplace is legally vulnerable and has been disallowed in AO assessments even before the 2026 Rules made the condition explicit.

HRA exemption is available in the old regime only. If you are in the new regime, none of this applies — but it may be worth running the salary calculator to see whether your HRA is large enough to justify switching.

Documentation checklist — what you need before filing

The HRA exemption requires supporting evidence if asked. Compile this before the end of the financial year, not in March when receipts are harder to track.

  • Rent receipts for every month, signed by the landlord, showing their name, address, rent amount and PAN (required if annual rent exceeds ₹1 lakh)
  • Rent agreement / lease deed — registered if possible, unregistered if not, covering the period claimed
  • Landlord PAN — mandatory if annual rent exceeds ₹1,00,000; your employer requires you to submit this before computing Form 16
  • Bank transfer records showing rent payments — cash rent is harder to defend
  • Proof of city — if there is any ambiguity about whether your rental address is in the place of employment, your workplace address and rent address should demonstrably match

How HRA interacts with home loan interest

You can claim HRA exemption and home loan interest deduction simultaneously — but only if the two properties are in different cities. If you own a flat in Mumbai and rent a different property in Mumbai where you actually live, the HRA and home loan claims conflict, because you are claiming to need rental accommodation in the same city where you own a home.

The Income-tax Department does not have an automatic bar on dual claims in the same city, but it is a red flag in assessments, and the burden falls on you to demonstrate genuinely different circumstances (e.g., your owned flat is let out and you must rent elsewhere). The home loan tax guide covers the let-out property scenario in full.

When does HRA alone justify the old regime?

HRA exemption alone can justify the old regime at higher CTC levels. A person in Bengaluru paying ₹50,000/month rent on a ₹36L CTC (basic ₹18L) could claim roughly ₹3.6L of HRA exemption (Formula C: 50% of ₹18L, if that is the binding constraint, assuming HRA received also covers it). At the 30% slab that is ₹1.08L of tax saved — often enough, combined with full 80C, to make the old regime competitive. Run both scenarios in the salary calculator to see the exact margin.

Want to see how HRA fits into your full salary picture? Open the salary calculator →

Official sources

Every figure traces to the primary legislation.

Income-tax Act, 2025 — Section 10(13A) The statutory basis for HRA exemption. The three-formula test and the fundamental conditions sit here. Renumbered from Section 10(13A) of the Income-tax Act, 1961. incometax.gov.in
Income-tax Rules, 2026 — Rule 279 (notified 20 March 2026) Designates the 8 cities eligible for the 50% rate: Mumbai, Delhi, Kolkata, Chennai, Bengaluru, Hyderabad, Pune and Ahmedabad. The last four were added with effect from 1 April 2026. Also introduces the place-of-employment condition for the rented accommodation. egazette.gov.in
CBDT guidance on PAN requirement for rent Landlord PAN is mandatory where annual rent paid exceeds ₹1,00,000. Form 12BB (investment declaration) requires the PAN to be submitted to the employer for Form 16 computation. incometax.gov.in
Last updated: 21 August 2026 · Applies to: Tax Year 2026-27. Methodology: HRA exemption computed as the minimum of: (A) HRA received from employer; (B) Rent paid minus 10% of basic salary; (C) City rate (50% or 40%) times basic salary. Basic salary is the basic component only. The calculator uses annual figures throughout. This is an educational estimate — confirm with your employer and a qualified professional before making a declaration.

Frequently asked questions

Yes, but with significant documentation requirements. You must pay genuine rent (by bank transfer, not cash), your parents must own the property and declare the rent as income in their returns, and you must have a rent agreement. The Income-tax Department has upheld such claims where documentation is clean. The risk lies in assessments where the AO questions whether the arrangement is genuine, particularly in the same city as your workplace.
No HRA component in your CTC means Formula A = ₹0, and since the exemption is the minimum of the three formulas, the entire exemption is ₹0. You cannot claim HRA exemption without a named HRA line in your salary structure. This is a structuring decision — if you rent and are in the old regime, asking your HR to restructure your salary to include an HRA component (at the cost of some other allowance or basic) is often the highest-value change you can make.
Mumbai, Delhi, Kolkata, Chennai, Bengaluru, Hyderabad, Pune and Ahmedabad — under Rule 279 of the Income-tax Rules, 2026. Bengaluru, Hyderabad, Pune and Ahmedabad were added from 1 April 2026. All other locations, including Noida, Gurugram, Navi Mumbai, Thane and all tier-2 cities, remain at 40% of basic.
No. HRA exemption under Section 10(13A) is an old-regime-only deduction. Under the new regime, the entire HRA received from your employer is taxable as part of your salary. This is often the single largest reason why a high-rent employee in a metro city finds the old regime more attractive despite lower slab rates in the new regime.
Formula B — rent paid minus 10% of basic — is almost always the binding constraint when rent is moderate. If monthly rent is lower than the city-rate percentage of basic, your rent is the limiting factor and the exemption simply equals rent minus 10% of basic (annual). This is why paying higher rent — where the economics allow it — can directly increase your HRA exemption, up to the point where Formula A (HRA received) becomes binding.
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