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House Rent Allowance (HRA)

A salary component meant to offset rental costs, with a tax exemption calculated as the smallest of three specific amounts — available only under the old tax regime.

What it is

House Rent Allowance (HRA) is a salary component paid to employees to help cover the cost of rented accommodation. Under the old tax regime, a portion of HRA can be exempt from tax if the employee actually pays rent; under the new tax regime, HRA exemption is not available at all, and the full HRA amount is taxed as regular salary.

How the exemption is calculated (old regime only)

Where it's available, the exempt portion of HRA is the least of the following three amounts:

  1. The actual HRA received from the employer;
  2. Rent paid, minus 10% of basic salary plus DA; and
  3. 50% of basic salary plus DA for employees living in one of the specified metro cities, or 40% of basic salary plus DA for a non-metro location.

These percentage thresholds — 50% for metros, 40% for non-metros, and the 10%-of-basic offset — have been part of the exemption formula for a long time and can be treated as reliable. The exemption is only ever available to employees who actually pay rent and can document it, typically with rent receipts and a landlord PAN declaration above a specified rent amount.

Why it matters for payroll

Because the exemption depends entirely on the tax regime chosen and on rent actually paid, not just HRA received, payroll needs a documented declaration-and-proof process each year, and needs to correctly apply — or correctly skip — the exemption depending on which regime the employee has elected for that financial year.