HRA Exemption for FY 2026-27: Calculation, the New 8-City Rule and the Proofs You Need

The Short Answer

House rent allowance (HRA) is partly tax-free if you live in a rented house and stay in the old tax regime. The exempt part is the lowest of three amounts: the HRA you receive, the rent you pay minus 10% of your salary, and 50% of salary in the big cities (40% elsewhere). Here, “salary” means basic pay plus DA.

From FY 2026-27 the 50% limit covers eight cities instead of four: Bengaluru, Hyderabad, Pune and Ahmedabad joined Delhi, Mumbai, Kolkata and Chennai. If you rent in one of the four new cities, your exemption can rise by up to 10% of your basic salary.

Two catches. HRA is fully taxable in the new regime, which is now the default. And from this year you must tell your employer whether your landlord is a relative.

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The Formula

How HRA exemption is calculated

Work out three amounts for the months you actually paid rent. The smallest is tax-free; the rest of your HRA is taxed as salary.

Limit	What it is
1	HRA actually received from your employer
2	Rent actually paid, minus 10% of salary
3	50% of salary in the eight listed cities; 40% everywhere else

Because limit 2 depends on rent, the exemption rises with rent only up to a point. Once rent minus 10% of salary is bigger than one of the other two limits, paying more rent does not reduce your tax at all.

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The Eight Cities

Which cities get the 50% limit

City	FY 2025-26 (return due 2026)	FY 2026-27 onward
Delhi, Mumbai, Kolkata, Chennai	50%	50%
Bengaluru, Hyderabad, Pune, Ahmedabad	40%	50%
Every other city and town	40%	40%

The change came with the Income-tax Rules, 2026, which took effect with the new Income-tax Act, 2025 on 1 April 2026. It applies to rent paid from April 2026. If you are filing a belated or revised return for FY 2025-26, the old four-city list still applies.

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Worked Examples

Two examples

Priya, Bengaluru

Priya’s basic salary is ₹60,000 a month. She gets ₹30,000 a month as HRA and pays ₹40,000 a month in rent. Over the year:

Limit	FY 2025-26	FY 2026-27
1. HRA received	₹3,60,000	₹3,60,000
2. Rent minus 10% of salary	₹4,08,000	₹4,08,000
3. 40% / 50% of salary	₹2,88,000 (40%)	₹3,60,000 (50%)
Exempt HRA	₹2,88,000	₹3,60,000

The eight-city rule makes ₹72,000 more of her HRA tax-free. In the 30% slab, that saves her ₹22,464 a year with cess, as long as she stays in the old regime.

Rohit, Ranchi

Rohit’s basic is ₹40,000 a month, his HRA ₹16,000 and his rent ₹12,000. Limit 1 is ₹1,92,000 and limit 3 (40%) is also ₹1,92,000, but limit 2 is only ₹96,000: ₹1,44,000 of rent minus ₹48,000 (10% of salary). His exemption is ₹96,000, and the other ₹96,000 of HRA is taxed. In smaller cities with modest rents, it is usually limit 2 that decides the exemption.

Try your own numbers in the HRA calculator; it shows which limit is holding you back.

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Proofs

What you need to claim HRA

• Rent receipts or a rent agreement. Pay by bank transfer or UPI where you can; cash rent is harder to defend.
• Landlord’s PAN if total rent for the year is more than ₹1 lakh. If the landlord has no PAN, a signed declaration from them saying so.
• Form 124 (it replaced Form 12BB in April 2026): the declaration you give your employer for HRA and other claims. It now asks whether the landlord is related to you.
• Your regime choice. Your employer will only allow HRA in your TDS if you have opted for the old regime for the year.

If your employer did not allow the exemption (because proofs came late, say), you can still claim it in your income tax return, as long as you file under the old regime by the due date.

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Special Cases

Rent to parents, spouse, and other situations

Paying rent to your parents

This is allowed if it is genuine: a written agreement, rent actually paid from your account to theirs, and your parent showing it as rental income in their own return. The house must belong to the parent you pay. Since FY 2026-27 you also disclose the relationship to your employer, so the arrangement will be visible.

Paying rent to your spouse

Tax officers usually treat this as an arrangement within the household and disallow it. We would not rely on it.

HRA and a home loan together

You can claim both if they are for different houses: for example, you own a flat in your home town or in another city, and rent where you work. You cannot claim HRA for living in a house you own.

Living in a house you own, but renting in another city

HRA covers the rented house where you actually live. A house you own elsewhere does not stop the claim.

No HRA in your salary?

Self-employed people, and employees whose pay has no HRA component, can claim a deduction for rent instead (section 80GG under the old Act). It is the lowest of ₹5,000 a month, 25% of total income, and rent minus 10% of total income, and is not available if you, your spouse or minor child own a house in the city where you live. It too is available only in the old regime.

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Old or New Regime

Is HRA worth staying in the old regime for?

Only if all your deductions together beat the break-even. At a salary of ₹15 lakh, the old regime needs about ₹5.4 lakh of deductions before it costs less than the new one; at ₹20 lakh, about ₹7.1 lakh. HRA is often the largest single item, and with full 80C, health insurance and NPS on top it can tip the balance, especially in the four new 50% cities.

Run your figures through the old vs new tax regime calculator, and read which regime to choose.

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Common Mistakes

Mistakes people make with HRA

1. Using total salary instead of basic plus DA

The 10% and 40%/50% limits are based on basic plus DA, not your CTC. Using gross pay overstates the exemption.

2. Assuming more rent always means more exemption

Once limit 1 or limit 3 is the lowest, extra rent changes nothing. The calculator shows your ceiling.

3. Claiming HRA in the new regime

It is not allowed. If you file under the new regime, the full HRA is taxable even if your employer exempted it in TDS.

4. Paper rent to relatives

Rent to a parent must actually be paid and declared by the parent. Rent to a spouse is usually disallowed. Fake receipts are the most common reason HRA claims fail.

5. Using the new city list for last year

For FY 2025-26, Bengaluru, Hyderabad, Pune and Ahmedabad were still at 40%.

Questions

Frequently asked questions

How is HRA exemption calculated?

It is the lowest of three amounts: the HRA you receive, the rent you pay minus 10% of your basic plus DA, and 50% of basic plus DA in Delhi, Mumbai, Kolkata, Chennai, Bengaluru, Hyderabad, Pune and Ahmedabad (40% elsewhere). The rest of your HRA is taxable.

Which cities get 50% HRA exemption from FY 2026-27?

Delhi, Mumbai, Kolkata, Chennai, Bengaluru, Hyderabad, Pune and Ahmedabad. Until FY 2025-26 only the first four had the 50% limit.

Can I claim HRA in the new tax regime?

No. HRA exemption is available only in the old regime. In the new regime, all of your HRA is taxable.

Is landlord PAN mandatory for HRA?

Your employer needs the landlord’s PAN if the rent is more than ₹1 lakh for the year. If the landlord has no PAN, a declaration from the landlord is needed instead.

Can I pay rent to my parents and claim HRA?

Yes, if the house belongs to the parent, the rent is actually paid, ideally by bank transfer, and the parent shows it as income in their return. From FY 2026-27 you must disclose to your employer that the landlord is a relative.

Can I claim HRA and home loan interest together?

Yes, if the house you rent and the house you own are different, for example because you work in another city. You cannot claim HRA for a house you own and live in.

My employer did not give me the HRA exemption. Can I still claim it?

Yes, in your income tax return, if you file under the old regime by the due date and have the rent proofs.