PERSONAL FINANCE

What Is HRA? How Renting an Apartment Can Lower Your Tax Bill

VC By Victor Cranson · July 1, 2026 · 3 min read

House Rent Allowance (HRA) is a component of salary that many employers pay to help cover an employee’s rental housing costs, and a portion of it can be claimed as tax-exempt under the Income Tax Act, provided you actually live in rented accommodation and meet the required conditions. HRA is different from most salary components in that a specific formula, not the full amount received, determines how much of it is actually exempt from tax.

HRA exemption is available only under the old tax regime; the new tax regime does not allow this exemption, treating the full HRA component as taxable salary income instead.

How the HRA exemption is actually calculated

The exempt portion of HRA is the lowest of three amounts: the actual HRA received from the employer during the year, actual rent paid minus 10% of basic salary (plus dearness allowance, if applicable), or 50% of basic salary if you live in a metro city (Delhi, Mumbai, Kolkata, or Chennai) or 40% if you live in a non-metro city. Whichever of these three figures is the smallest becomes your tax-exempt HRA amount; the remainder of the HRA you actually received is added to your taxable income like regular salary.

This “lowest of three” structure means simply knowing your HRA amount doesn’t tell you the exemption, you need your actual rent paid and your basic salary to calculate it properly, and the exemption can vary significantly depending on how these three figures compare for your specific situation.

Documentation you actually need

To claim HRA exemption, you generally need to provide rent receipts to your employer during the year (for TDS calculation purposes) and, if your annual rent exceeds ₹1 lakh, your landlord’s PAN as well. At return-filing time, if you’re claiming HRA that wasn’t already accounted for by your employer, keeping rent receipts, the rental agreement, and proof of rent payment (bank transfers are stronger evidence than cash payments) is worth doing in case of a later query from the tax department.

What if you don’t receive HRA but still pay rent

If your salary structure doesn’t include an HRA component, or you’re self-employed, but you still pay rent, Section 80GG provides a separate, more limited deduction for rent paid, subject to its own conditions and a lower cap than HRA typically allows, available only if you (and specific family members) don’t own residential property in the city where you live or work, and provided you’re not already claiming HRA.

Can you claim HRA and a home loan deduction at the same time

Yes, in specific and fairly common circumstances: if you live in a rented home in one city (for work) while owning a home loan-funded property elsewhere (perhaps in your hometown, currently vacant or occupied by parents), you can generally claim HRA exemption on the rent you pay and, separately, the home loan interest deduction on the property you own, since these relate to genuinely different situations. This is a frequently used, legitimate structure, though claiming both requires accurate documentation for each and can occasionally draw closer scrutiny, so the underlying facts (you genuinely live in a different city, the home loan property is genuinely owned and financed as claimed) need to actually hold up.

Bottom Line

HRA exemption isn’t automatic just because your salary includes an HRA component, it’s a calculated amount based on actual rent paid, your basic salary, and your city, available only under the old tax regime. Understanding the three-part formula, and keeping proper rent documentation, is what turns a salary component into an actual, defensible tax saving rather than a number that looks better on the offer letter than it performs at filing time.

This article is for general information and isn’t personalized tax advice. Consult a qualified tax professional or chartered accountant for guidance specific to your situation.