How HRA exemption is worked out
Under the old tax regime, the part of your house rent allowance that is exempt from tax is the least of:
- the HRA you actually receive;
- the rent you pay, minus 10% of your salary;
- 50% of your salary if you live in a listed city, or 40% anywhere else.
"Salary" here is your basic pay plus the dearness allowance that counts for retirement benefits, not your gross pay. The rest of your HRA is added to your taxable income.
Eight cities get the 50% limit from 2026-27
Until the 2025-26 tax year, only Delhi, Mumbai, Kolkata and Chennai qualified for the 50% limit. The Income-tax Rules, 2026, notified by the Central Board of Direct Taxes on 20 March 2026 and in force from 1 April 2026, add Bengaluru, Hyderabad, Pune and Ahmedabad. If you pay rent in one of these four cities, more of your HRA can now be exempt.
An example
You earn a basic salary of ₹50,000 a month in Bengaluru, receive ₹20,000 a month as HRA and pay ₹25,000 a month in rent. Over the year, that is HRA of ₹2,40,000, rent of ₹3,00,000 and salary of ₹6,00,000. The three amounts are ₹2,40,000 (HRA received), ₹2,40,000 (rent minus 10% of salary) and ₹3,00,000 (50% of salary, since Bengaluru is now listed). The least is ₹2,40,000, so all your HRA is exempt in 2026-27. In 2025-26, at 40%, the third amount would have been ₹2,40,000 too, so the exemption is the same here; it differs when your rent is higher.
HRA and the new tax regime
The HRA exemption is available only under the old tax regime. Under the new regime, which is the default, your whole HRA is taxable, though the regime's lower rates and standard deduction may still leave you paying less tax. Compare both before you choose.
