House Rent Allowance (HRA) is a salary component that employers pay to help employees cover the cost of rented housing. In India, part of it can be exempt from income tax under the old tax regime when the employee pays rent and keeps the right documents. It is a fixed allowance, not a reimbursement, and it does not apply to employees who live in a house they own. HR and payroll teams use it when designing Cost to Company packages and calculating tax deducted at source.
HRA in India vs HRA in the US
This page covers House Rent Allowance as used in Indian payroll. In the US, HRA usually means Health Reimbursement Arrangement, an employer-funded plan that reimburses medical expenses, which has nothing to do with rent.
How HRA Works
Employers usually set HRA as a share of basic salary, often 40 to 50 percent depending on company policy and city. It appears in the Cost to Company package alongside basic pay and other allowances. Employees who do not pay rent cannot claim an exemption, so their full HRA is taxable.
How the HRA Exemption Is Calculated
The exempt amount is the lowest of three figures, calculated on salary (basic plus dearness allowance where it applies). These are the three figures:
- Actual HRA received
- 50 percent of salary in a metro city, or 40 percent elsewhere
- Rent paid minus 10 percent of salary
Take an employee in Pune with a ₹50,000 monthly basic salary, ₹25,000 in HRA, and ₹18,000 in rent. The three figures are ₹25,000, ₹25,000, and ₹13,000 (rent minus ₹5,000). The lowest, ₹13,000, is exempt each month and the other ₹12,000 is taxable. This is an illustration, not advice.
Metro Cities for HRA in 2026
Eight cities now qualify for the higher 50 percent limit. Under the Income-tax Rules, 2026, which took effect on April 1, 2026, Mumbai, Kolkata, Delhi, Chennai, Hyderabad, Pune, Ahmedabad, and Bengaluru get the 50 percent limit, while all other locations stay at 40 percent. Before this, only Mumbai, Delhi, Kolkata, and Chennai were treated as metros. Payroll teams should update city mapping for FY 2026-27 salary processing.
Eligibility and Documents
Employees can claim the exemption when they meet these conditions:
- HRA is part of their salary.
- They pay rent for residential accommodation.
- They have chosen the old tax regime.
- They keep rent receipts, a rental agreement, and proof of payment.
When annual rent is above ₹1 lakh, the landlord’s PAN is required. The 2026 rules also require employees to disclose their relationship with the landlord, if any, when claiming HRA.
HRA and the New Tax Regime
The HRA exemption is not available under the new tax regime. Employees who choose it pay tax on the full HRA. Employees compare their total tax under both regimes, and payroll teams should record each person’s declared choice.
Common HRA Mistakes in Payroll
Watch for these errors:
- Using the old four-city metro list after April 1, 2026
- Calculating on basic pay when dearness allowance applies
- Missing rent receipts or landlord PAN
- Skipping the landlord relationship disclosure
- Not recording each employee’s tax regime choice
For more terms like this, browse the Engagedly HR Glossary.
Frequently Asked Questions
What is House Rent Allowance?
House Rent Allowance is a salary component paid by employers to help employees cover rent. It is a fixed amount in the pay package, not a reimbursement. In India, part of it may be tax exempt under the old tax regime if the employee pays rent and meets documentation rules.
Is HRA fully taxable?
Not always. HRA is taxable by default, but a portion can be exempt for employees who pay rent and claim it under the old tax regime. If the employee lives in their own home or does not claim it, the full amount is taxable.
How is the HRA exemption calculated?
The exempt amount is the lowest of three figures. These are the HRA actually received, 50 or 40 percent of salary depending on the city, and rent paid minus 10 percent of salary. The rest of the HRA is added to taxable income.
Which cities get the 50 percent HRA limit?
From April 1, 2026, the 50 percent limit applies to Mumbai, Delhi, Kolkata, Chennai, Bengaluru, Hyderabad, Pune, and Ahmedabad. All other locations use 40 percent. Earlier, only the first four cities were treated as metros.
Is HRA available under the new tax regime?
No. The new tax regime does not allow the HRA exemption, so the full HRA is taxed. Employees who pay high rent may do better under the old regime, but they should compare their total tax under both regimes each year.
Can I claim HRA if I pay rent to my parents?
Often yes, if the rent is genuine. You need a rental agreement, rent receipts, and bank transfer proof, and your parents must own the home and declare the rent as income. Check your situation with a tax professional.
Is the landlord’s PAN required?
Yes, when annual rent is above ₹1 lakh, which works out to about ₹8,333 a month. Employees should also disclose any relationship with the landlord when claiming HRA under the 2026 rules.
What does HRA mean in the US?
In the US, HRA usually means Health Reimbursement Arrangement, an employer-funded plan that reimburses qualified medical expenses. It is unrelated to House Rent Allowance, which is a salary component linked to rent.
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