What is HRA? Full Form, Meaning, Exemption Rules & HRA Calculation

HRA Full Form

The full form of HRA is House Rent Allowance. It is a component of an employee’s salary that is provided by an employer to help meet the cost of rented accommodation. The amount of HRA offered may vary based on the employer’s salary structure, the employee’s basic salary, and other applicable factors.

If you receive HRA and pay rent for the residential property you occupy, you may be eligible to claim a tax exemption on a portion of the allowance under the applicable provisions of the Income Tax Act, 2025.

What is House Rent Allowance(HRA)?

House Rent Allowance (HRA) is an allowance that employers may include as part of an employee’s salary to help cover rental expenses. The amount received as HRA depends on the employer’s salary structure and may vary across employees.

HRA forms part of the employee’s gross salary. However, if the employee lives in rented accommodation and meets the prescribed conditions, a portion of the HRA received may qualify for tax exemption under the old tax regime. Any HRA amount that does not qualify for exemption is included in taxable salary.

The exemption available is calculated based on the employee’s salary, actual HRA received, rent paid, and the location of the rented accommodation.

Who Can Avail of HRA?

House Rent Allowance, commonly called HRA, can be availed of by salaried individuals who receive it as a component of their salary and live in a rented residential accommodation. HRA benefits are available to self-employed individuals under Section 134 if they live in a rented house and meet the given conditions.

How is House Rent Allowance Determined?

House Rent Allowance depends on the city where the employee stays. For instance, individuals who live in metropolitan cities are entitled to HRA that will be equivalent to 50% of their basic salary. This percentage comes down to 40% of one’s basic salary when one resides in any other city. Furthermore, if you do not get any Dearness Allowance or commissions, your HRA should ideally be equal to 40% to 50% of your basic pay.

How to Calculate HRA with an Example

There are 3 ways to calculate your HRA benefit. The exemption of HRA benefit is the least of the below 3 calculations.

The exact HRA received
The actual rent paid minus 10% of your basic salary
50% of your basic pay (for a metro city) or 40% of your basic salary (for a non-metro city)

The minimum amount from the above three is computed as the HRA tax exemption that one may claim.

Let us understand it with an example. Aradhana works for an IT firm in Pune. She stays in a rented flat, paying Rs. 7000 per month. Her monthly salary is Rs. 45,000 with Rs. 8,500 as HRA and Rs. 25,000 as basic pay. Now, let us understand her HRA exemption according to the above 3 calculations:

By using the actual HRA from the employer:
Annual HRA from her employer = 8500 x 12
= Rs.1,02,000
By calculating the actual rent paid minus 10% of your basic salary
The rent paid in a single year = 7000 x 12 = Rs. 84,000
By using the HRA percentage formula = (Actual rent – 10% of basic pay)
= {(7,000 x 12) – [(10% of 25,000) x 12]}
= 84,000 - 30,000
= Rs.54,000
40% of your basic salary (for a non-metro city)
Since Pune is a non-metro city, 40 % of the basic pay will be considered.
So, 40% of (25,000 x 12)
= 40/100 x 3,00,000
= Rs.1,20,000

Now, according to the above 3 calculations, the maximum HRA deduction that Aradhana can claim under Section 123 of the Income Tax Act will be the lowest of these figures, i.e. Rs.54,000. Note that the remaining Rs.48,000 of the HRA will be taxable as per her income tax slab. Taxpayers can compute applicable HRA rebates through manual calculations.

Documents Required to Claim HRA

If you plan to claim HRA exemption under Schedule III (Table: S. No. 11) of the Income Tax Act, 2025, you may need to keep the following documents ready. These help your employer verify the rent paid and determine the eligible exemption.

Rent Receipts
Rent receipts serve as proof of the rent paid to your landlord. They should generally include:
- Your name
- Landlord’s name
- Address of the rented property
- Rent amount and the period for which it was paid
- Date of payment
- Landlord’s signature
Rental or Lease Agreement
A valid rental or lease agreement helps establish the tenancy and should typically mention:
- Name of the tenant and landlord
- Monthly rent
- Tenancy period
- Address of the rented property
Your employer or the tax authorities may ask for this document as supporting evidence.
Landlord’s PAN, Where Applicable
If the total rent paid during the year exceeds Rs.1 Lakh, you may be required to provide your landlord’s PAN to your employer.
Proof of Rent Payment
It is advisable to retain records that support the rent payments made, such as:
- Bank statements
- Cheque details
- Online transfer records
- UPI transaction records
These can serve as additional evidence of the rent paid.
HRA Declaration and Salary Records
Your employer may require you to submit an HRA declaration confirming that you are paying rent and claiming the exemption. Your salary slip or Form 130 may also reflect the HRA component included in your salary.

Eligibility Criteria for HRA Exemption

You are eligible to claim HRA tax exemption under Schedule III (Table: S. No. 11) only if you satisfy these conditions:

You should be a salaried employee, and your salary should include an HRA component.
You should be living in rented accommodation and actually paying rent.
You should reside in the rented property for the purpose of your employment or work assignment. Living on rent with parents is also permitted, provided they are the legal owners of the property and proper documentation is maintained.

HRA Guidelines for Self-Employed Individuals

Self-employed individuals can claim a deduction for rent under Section 134, provided certain conditions are met. This Section allows a deduction if you live in rented accommodation and do not receive HRA from any employer. To qualify, you must ensure that:

You are either self-employed or a salaried individual who does not receive HRA.
You, your spouse, or your minor child does not own any residential property at the place where you currently live or work.
If you own property elsewhere, you cannot claim it as a self-occupied property.
You pay rent for the accommodation you reside in.

Rs.5,000 per month,
25% of your total income, or
Rent paid minus 10% of your total income.

Can I Claim HRA and Deductions on Home Loan Interest?

Taxpayers can claim both HRA as well as deductions on home loan interest and principal repayment amount if specific conditions are fulfilled, such as:

You live in a rented place while having a house on loan in a different city
You have secured a home through housing loan, but you reside in a rented house in the same city due to work or children’s schooling
You have acquired an under-construction property on loan and therefore you live elsewhere on rent until building completion and possession
If your house is rented out and you live in a rented property, you will have to disclose your rental income or income from property for appropriate tax deduction.

Also Read: How to File your ITR for Home Loan

What If I Don’t Receive an HRA From My Employer

If you pay rent for your residential premises but do not receive HRA from your employer, you can still obtain deductions under Section 134 in the following circumstances:

You are a self-employed or salaried individual
You have not availed of HRA at any time during the year for which you wish to claim 134 rebates
You, your spouse, minor child, or your family, which may constitute a HUF, should not own any residence at the place where you currently live or have an office for employment, business or profession.

Individuals who own house properties other than those mentioned here cannot claim benefits on the house as self-occupied. Any other property can be deemed let out to obtain the Section 134 exemption.

HRA and City Compensatory Allowance

Companies extend HRA to help employees take care of their rented housing costs. Additionally, they also provide wages to employees, publicly or privately, to compensate for higher living expenditures in metro or tier-1 cities, commonly known as City Compensatory Allowance (CCA). While one can claim tax exemptions up to Rs.1 Lakh for HRA, the CCA allowance is fully taxable. People working in tier-2 cities may be considered eligible for CCA in certain instances.

CCA depends on your pay scale and grade and not the basic salary resulting in wage variance by city. For example, a person working in Mumbai may get a larger CCA than someone based in Delhi or Bengaluru.

How to Claim HRA When Living With Parents

In such a scenario, you need to legally pay rent to your parents and maintain the receipts. One has to sign a rental agreement with their parents and transfer the agreed sum every month. This will help you save taxes as well. On their part, your parents are required to report the rent they receive as earnings in their income tax returns. If their overall income is below the basic exemption limit or taxable at a lower tax slab, they can save tax on such family income.

How to Claim Deduction Under Section 134

As per Section 134, one can expect the lowest of the following for tax benefit:

Rs.5,000 per month
25% of the adjusted total income
Actual rent should not exceed 10% of the adjusted total income
Adjusted total income is computed as: The total income minus your long-term capital gains, short-term capital gains under Section 196, income under Section 210 and 123 to 154 (barring rebates under Section 134)

How Does the New Income Tax Regime Affect HRA?

Under the new tax regime, House Rent Allowance can continue to form part of an employee’s salary. However, the tax exemption available on HRA cannot be claimed. As a result, the entire HRA received is included in taxable salary when income is computed under the new tax regime.

Employees who opt for the old tax regime may continue to claim HRA exemption. Therefore, employees who receive HRA and pay rent should consider the overall deductions and exemptions available to them when comparing the old and new tax regimes, rather than evaluating HRA in isolation.

Frequently Asked Questions

The full form of HRA is House Rent Allowance. It is a component of salary that an employer may provide to help employees meet the cost of rented accommodation. Eligible employees may claim an exemption on HRA under the old tax regime.

For HRA exemption calculation from Tax Year 2026-27, 50% of salary is considered for rented accommodation in Mumbai, Kolkata, Delhi, Chennai, Hyderabad, Pune, Ahmedabad, and Bengaluru. For accommodation in any other location, 40% of salary is considered. The final HRA exemption is the lowest of the prescribed amounts.

No, HRA can continue to form part of your salary under the new tax regime, but the tax exemption on HRA is not available. Eligible employees need to opt for the old tax regime to claim HRA exemption.

The landlord's PAN must be provided to the employer if the aggregate rent paid during the tax year exceeds Rs.1 Lakh. If the annual rent does not exceed this threshold, providing the landlord's PAN is not mandatory for this purpose.

Yes, it may be possible to claim HRA exemption and a deduction on eligible home loan interest in the same tax year if the respective conditions for both benefits are independently satisfied.

If HRA is not included in your salary, you cannot claim an HRA exemption. However, an eligible resident individual who pays rent for their residential accommodation may be able to claim a deduction under Section 134 of the Income Tax Act, 2025, subject to prescribed conditions.

Yes, if you receive HRA but do not actually pay rent for the residential accommodation you occupy, the HRA received does not qualify for exemption and is included in your taxable salary.

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