House rent allowance is one of the oldest, most-used tax breaks in Indian payroll, and one of the easiest to get wrong. The Income Tax Rules, 2026, that came into force on 1 April 2026 reshaped the exemption significantly: four more cities now qualify for the higher 50% salary cap, and every HRA claim must now carry a declaration of the landlord-tenant relationship.
Payroll teams running Form 124 declarations and TDS computations for FY 2026-27 have to apply the new metro list, the new disclosure field, and the fresh scrutiny lens the tax department has started bringing to rent receipts. Get the setup right, and the exemption still works as intended. Get the paper trail wrong, and the entire claim collapses at assessment.
What Is House Rent Allowance (HRA)?
HRA is a fixed cash allowance that employers pay salaried staff to help meet rent on residential accommodation. It’s a standard component of most Indian CTC structures, usually set at 40% to 50% of basic salary depending on the city of posting.
By default, HRA is fully taxable as part of salary. A portion becomes tax-exempt only when the employee is salaried, actually pays rent, and files under the old tax regime. The provision governing this exemption sits in Section 10(13A) of the Income-tax Act, 1961, and continues under the equivalent provision of the Income-tax Act, 2025, with the calculation mechanics preserved almost unchanged.
What Changed for HRA Exemption in 2026?
The HRA framework was carried over into the new tax code with meaningful tweaks. The Central Board of Direct Taxes notified the Income-tax Rules, 2026 on 20 March 2026, operationalising the Income-tax Act, 2025 from 1 April 2026, and the rules reset the metro list that governs the 50% salary cap.
Here’s what’s new for Tax Year 2026-27:
| Change | What It Means |
| Expanded metro list | Bengaluru, Hyderabad, Pune and Ahmedabad move into the 50% bracket, joining Mumbai, Delhi, Kolkata and Chennai |
| Landlord-tenant disclosure | Employees must declare any relationship with the landlord when claiming HRA, in the specified form |
| Form 124 replaces Form 12BB | The annual employee declaration form has been renumbered under the new rules |
| Section renumbering | The deduction for rent paid without HRA (old Section 80GG) now sits at Section 134 of the 2025 Act |
Returns filed for FY 2025-26 (ITR deadline 31 July 2026) still use the 1961 Act and the four-metro list. Only income earned from 1 April 2026 falls under the expanded rules. HR teams still filing late or revised returns for the prior year should keep both frameworks in play, and our breakdown of the 11 changes under the new Income Tax Act 2025 covers the wider reset beyond HRA.
Who Can Claim HRA Exemption?
HRA exemption isn’t automatic. It’s limited to employees whose salary structure includes an HRA component and who are actually spending that allowance on rented residential accommodation.
The eligibility test runs through these conditions:
- The individual must be a salaried employee receiving HRA as a defined salary component
- Rent must actually be paid for residential accommodation occupied during the relevant period
- The employee cannot be the owner of the same accommodation
- The claim is available only under the old tax regime, which rules out most employees on the default new regime
- Self-employed professionals and freelancers aren’t eligible under this route, and claim rent relief under Section 134 (old 80GG) instead
Owning a house in a different city doesn’t disqualify an employee. An engineer who owns a flat in Lucknow but pays rent in Hyderabad can still claim HRA on the Hyderabad rent, provided the salary structure supports it.
HRA Exemption in the Old vs New Tax Regime
HRA exemption is one of the specific allowances the new tax regime switches off. The deduction sits in the list of exemptions explicitly disabled under the new regime, which means an employee on the default new regime pays tax on the full HRA received, even if they’re paying rent of ₹40,000 a month.
A quick comparison:
| Feature | Old Tax Regime | New Tax Regime (Default) |
| HRA exemption under 10(13A) | Available | Not available |
| Section 134 (80GG) rent deduction | Available | Not available |
| Standard deduction | ₹50,000 | ₹75,000 |
| Section 87A rebate | Up to ₹12,500 | Up to ₹60,000 (income ≤ ₹12 lakh) |
| Chapter VIII deductions (80C, 80D, etc.) | Available | Most unavailable |
Employees in metro cities paying substantial rent and claiming 80C and 80D deductions often come out ahead on net tax under the old regime. Payroll teams should offer a regime-comparison calculation at the start of every financial year, since the choice sits with the employee but the TDS is cut by the employer.
How to Calculate HRA Exemption
The exemption formula is a three-leg test that returns the lowest of three values. The least of these amounts is the exempt portion, and the rest is taxed at the employee’s slab rate.
The legs run as follows:
- Actual HRA received from the employer during the period
- 50% of salary if the rented house is in a notified metro city, or 40% of salary for every other city
- Actual rent paid minus 10% of salary for the period
“Salary” for this calculation is a defined term. It includes basic salary plus dearness allowance (only where DA forms part of retirement benefits), plus commission based on a fixed percentage of turnover. Every other allowance and perquisite is excluded.
The calculation runs on a monthly basis if salary, HRA or rent changes mid-year, so a payroll move or an appraisal shift triggers a split computation. Metro status is determined by where the rented house actually sits, independent of office location or the employee’s permanent address.
HRA Exemption Calculation Examples: Delhi, Bengaluru and Mumbai
The three-leg test produces very different outcomes depending on city, salary and actual rent. Each example below uses an annual basic salary (no DA) and assumes the full year is spent in one location.
Delhi, FY 2026-27. Basic ₹8,00,000, HRA ₹3,20,000, rent paid ₹30,000 per month (₹3,60,000 annual).
| Leg | Calculation | Value |
| Actual HRA | ₹3,20,000 | ₹3,20,000 |
| 50% of salary (metro) | 50% × ₹8,00,000 | ₹4,00,000 |
| Rent minus 10% of salary | ₹3,60,000 − ₹80,000 | ₹2,80,000 |
| Exempt HRA | Least of the three | ₹2,80,000 |
Bengaluru, FY 2026-27. Basic ₹10,00,000, HRA ₹4,00,000, rent paid ₹35,000 per month (₹4,20,000 annual). Bengaluru now qualifies as a 50% metro.
| Leg | Calculation | Value |
| Actual HRA | ₹4,00,000 | ₹4,00,000 |
| 50% of salary (metro) | 50% × ₹10,00,000 | ₹5,00,000 |
| Rent minus 10% of salary | ₹4,20,000 − ₹1,00,000 | ₹3,20,000 |
| Exempt HRA | Least of the three | ₹3,20,000 |
Had this been FY 2025-26, Bengaluru would’ve been a 40% city (cap of ₹4,00,000), and the exempt amount would’ve stayed at ₹3,20,000 because the rent-minus-10% leg was already the binding constraint. The metro upgrade won’t help every Bengaluru renter. It only helps where the city-cap leg is the smallest of the three.
Mumbai, FY 2026-27. Basic ₹12,00,000, HRA ₹4,80,000, rent paid ₹65,000 per month (₹7,80,000 annual).
| Leg | Calculation | Value |
| Actual HRA | ₹4,80,000 | ₹4,80,000 |
| 50% of salary (metro) | 50% × ₹12,00,000 | ₹6,00,000 |
| Rent minus 10% of salary | ₹7,80,000 − ₹1,20,000 | ₹6,60,000 |
| Exempt HRA | Least of the three | ₹4,80,000 |
Here, the actual HRA received is the ceiling. An employee can’t claim more exempt HRA than their employer actually paid, no matter how high the rent runs.
Documents Required to Claim HRA Exemption
Payroll teams generally collect HRA documentation twice: once as an investment declaration at the start of the financial year, and again as proof before the February TDS cutoff. The documents that back up an HRA claim have to stand up to assessment scrutiny for seven years.
| Document | When Required | Purpose |
| Rent receipts | Monthly or quarterly | Primary proof of rent paid |
| Rent agreement | Recommended in all cases | Establishes genuineness, especially for rent to relatives |
| Landlord PAN | If annual rent exceeds ₹1,00,000 | Mandatory for employer to process the exemption |
| Bank transfer proof | For every month claimed | Replaces or supplements cash receipts |
| Landlord relationship declaration | Every claim from FY 2026-27 | New requirement under Income Tax Rules, 2026 |
| Form 124 | Annual employee declaration | Replaces Form 12BB from FY 2026-27 |
Where the landlord doesn’t have a PAN and the rent exceeds the ₹1,00,000 threshold, a signed declaration with Form 60 is the fallback. Receipts should be timestamped on receipt and kept digitally alongside the Form 16 archive.
Can You Claim HRA for Rent Paid to Parents?
Yes, and it’s a legitimate planning route, but only if the transaction is genuine. The Income Tax Act doesn’t bar renting from parents or other relatives, and the Delhi ITAT confirmed in Abhay Kumar Mittal vs DCIT that paying rent to a spouse is similarly permissible, provided the ownership and payment trail are intact.
What makes such a claim defensible:
- The parent must actually own the property, and the employee cannot be a co-owner
- Rent must flow through a bank channel rather than cash
- A written rent agreement should exist with payment terms, period and property details
- Monthly rent receipts must align with bank statement entries
- The parent must declare the rent as “income from house property” in their own ITR
The 2026 Rules add a wrinkle. Employees must now disclose the landlord-tenant relationship in Form 124, so a parent landlord will be flagged automatically. Disclosure alone doesn’t disqualify the claim. It does invite tighter scrutiny, especially where the parent is in a lower slab or has no other income. Casual arrangements that worked for years are now a documentation risk.
Not Getting HRA? How the Section 134 (Old 80GG) Deduction Works
Not every salary structure includes an HRA line, and self-employed professionals never get one. Section 134 of the Income-tax Act, 2025, which replaces Section 80GG of the 1961 Act, offers a smaller rent-paid deduction for exactly these cases.
Who qualifies:
- Salaried individuals whose CTC has no HRA component
- Self-employed professionals or business owners paying rent for their residence
- The individual, spouse, minor child or HUF must not own residential property at the place of work or ordinary residence
The deduction is the least of three amounts: ₹5,000 per month (₹60,000 annual cap), 25% of adjusted total income, and actual rent paid minus 10% of adjusted total income. Form 10BA (renumbered under the new rules) has to be filed to claim it, and like HRA, the deduction is off the table under the new tax regime.
How HR and Payroll Teams Should Verify HRA Claims
HRA verification routinely drives year-end payroll disputes. Most employers now ask for proof before cutting the final TDS of the year, but the Income Tax Rules, 2026 raise the bar on what counts as proof.
A working verification checklist:
- Confirm the HRA component actually appears in the employee’s salary structure for the months claimed
- Collect rent receipts in a prescribed format with date, period, amount and property address
- Mandate landlord PAN or Form 60 declaration where annual rent exceeds ₹1,00,000
- Match claimed amounts against bank transfer statements, flagging any cash-paid portion
- Capture the new landlord relationship disclosure in Form 124, routing parent, spouse or related-party claims into an enhanced-review bucket
- Reconcile metro status against the eight-city list where the employee has moved mid-year
- Lock down the window: no new declarations accepted after the February TDS cutoff
Teams running these checks through a payroll platform should audit the system for the 2026 city list and the new form fields. Our guide to PF, ESI, PT and TDS payroll compliance covers the broader statutory layer that sits alongside HRA verification.
Common HRA Exemption Mistakes
Even seasoned payroll teams drop the ball on HRA. These are the errors that show up most often in notice responses and salary audits, and most are straightforward reconciliation breaks rather than genuine disputes.
- Processing cash rent payments without receipts, which don’t survive scrutiny if the department asks for proof
- Allowing an employee to claim HRA on a property they or their spouse own in the same city of posting
- Missing the landlord PAN for rent above ₹1,00,000 and processing the exemption anyway
- Applying 50% to Bengaluru or Pune for FY 2025-26 (still 40% cities) or sticking with 40% for FY 2026-27 (now 50%)
- Running the three-leg calculation on CTC or gross salary instead of basic plus eligible DA
- Letting employees claim HRA while they’re also claiming home loan interest on a property in the same city without any commute justification
- Ignoring the regime comparison, which costs employees defaulting into the new regime the entire HRA exemption regardless of what they paid in rent
- Treating the labour code reset of wage definitions as unrelated to HRA, when a changed basic-pay ratio can swing the exempt amount
The fix for all of them is a verification SOP that runs the three-leg calculation afresh each year with the current metro list and the current form set.
In the End…
The 2026 rule change is less about calculation and more about documentation. Payroll teams processing HRA from April 2026 onwards should refresh their declaration workflow before the next TDS cycle: the employee declaration form (now Form 124 with the landlord relationship field), the metro-city master in the payroll system (now eight cities at 50%), and the verification SOP that governs rent receipts, bank proofs and PAN capture.
Running a mock calculation for a sample employee under both regimes, with the new city list and the new form, catches most downstream issues before they surface as employee grievances or notice responses. The exemption itself hasn’t become harder to claim. The paper trail just has to be cleaner.
FAQs
Is HRA exemption available under the new tax regime?
No. The new tax regime switches off HRA exemption under Section 10(13A) along with most Chapter VIII deductions. Employees who want to claim HRA have to opt into the old regime at the start of the financial year.
Which cities qualify for the 50% HRA exemption from FY 2026-27?
Eight: Mumbai, Delhi, Kolkata, Chennai, Bengaluru, Hyderabad, Pune and Ahmedabad. The last four were added by the Income Tax Rules, 2026 effective 1 April 2026. Every other city stays at the 40% salary cap.
How is HRA exemption calculated?
The exempt amount is the lowest of: actual HRA received, 50% of salary (metro) or 40% (non-metro), and actual rent paid minus 10% of salary. “Salary” here means basic pay plus dearness allowance (where DA forms part of retirement benefits), plus commission based on a fixed percentage of turnover.
Can I claim HRA if I pay rent to my parents?
Yes, provided the arrangement is genuine. The parent must own the property, rent must flow through a bank channel, a written rent agreement should exist, and the parent must declare the rental income in their ITR. From FY 2026-27, Form 124 also requires disclosure of the landlord-tenant relationship.
Is the landlord’s PAN mandatory for every HRA claim?
Only where annual rent paid to one landlord exceeds ₹1,00,000. Below that threshold, rent receipts and bank proofs suffice. Above it, the employer cannot process the exemption without the PAN or a Form 60 declaration.
Can self-employed professionals claim HRA?
No. Section 10(13A) is restricted to salaried employees receiving HRA as a defined salary component. Self-employed professionals and salaried employees without an HRA line claim rent relief under Section 134 of the Income-tax Act, 2025 (old Section 80GG), capped at ₹5,000 per month.
What replaced Form 12BB from FY 2026-27?
Form 124 under the Income Tax Rules, 2026. It carries the same investment and allowance declaration fields plus a new field for the landlord-tenant relationship where HRA is claimed.
Can an employee claim HRA and home loan interest together?
Yes, where the two properties aren’t in the same city, or where the employee can show a genuine reason for renting in the same city despite owning a house there (such as the owned house being too far from the workplace to commute). The home loan interest is claimed under the house property head, and HRA stays under salary. Claims that lack a commute or occupancy justification tend to attract scrutiny at assessment.
