HRA exemption — when, how much, and the parent-rent question

HRA (House Rent Allowance) is the largest deduction most salaried professionals can claim — frequently bigger than 80C. But it's also the one most often computed wrong, both by employers and by individuals.

The lower-of-three formula

HRA exemption is the minimum of these three:

1. Actual HRA received from your employer (per your salary structure).
2. Rent paid minus 10% of basic salary for the year.
3. 50% of basic salary if you live in a metro (Delhi, Mumbai, Kolkata, Chennai), else 40% of basic salary.

Whichever of these three is smallest — that's your exemption.

Worked example

Bengaluru (non-metro for HRA purposes), CTC ₹18L, basic 40% = ₹7.2L, HRA component 40% of basic = ₹2.88L. Monthly rent ₹35K = annual ₹4.2L.

• Option 1: Actual HRA = ₹2,88,000
• Option 2: Rent − 10% basic = 4,20,000 − 72,000 = ₹3,48,000
• Option 3: 40% of basic = ₹2,88,000

Lower of three = ₹2,88,000. That's the exemption. At 30% marginal rate, tax saved ≈ ₹89,856 (incl. cess).

What counts as a metro for HRA

Only Delhi, Mumbai, Kolkata, Chennai. Bengaluru, Hyderabad, Pune, Gurgaon, and every other Tier-1 city — surprisingly — are non-metro for HRA purposes. That's a quirk of the law dating from 1987.

Documentation you need

• Rent receipts. Monthly. Signed by landlord.
• Rent agreement. Best to register it (₹50–500 in stamp duty depending on state) — unregistered agreements are valid but easier to challenge.
• Landlord's PANif your annual rent exceeds ₹1,00,000. Mandatory. If they refuse to share, you can't claim.
• Bank statements showing rent transferred. Cash payments above ₹2L attract scrutiny — pay via UPI or bank transfer.

The parent-rent question

Yes, you can claim HRA paying rent to parents — but the IT Department is scrutinizing these. The rules: rent must actually be paid (bank transfer, not cash), your parent must declare it as rental income in their ITR (so family-level saving is smaller than individual), the parent should own the house (not you), and rent should be reasonable for the locality.

HRA-specific scrutiny triggers

• Annual rent above ₹1L without landlord PAN.
• Rent paid in cash above ₹2L/year.
• Rent paid to spouse or to a property you partly own.
• HRA claimed but no rent receipts on file.

Citations

Section 10(13A) of the Income Tax Act 1961. Rule 2A of Income Tax Rules 1962. CBDT Circular 8/2013.