HRA Exemption: How It's Calculated, With a Worked Example (2026-27)
The tax-free part of HRA is the lowest of three amounts. A worked example, the eight 50% cities from 2026-27, and what proof you need.
By the TurantTools team · Updated 16 October 2026 · 5 min read
Everyone sees “HRA” on their payslip, but very few people know how much of it is actually tax-free. The good news is that the calculation rests on three simple rules. Once you get them, filing your return each year becomes a lot easier.
The lowest of three amounts is tax-free
- The HRA you actually receive.
- Your rent, minus 10% of your salary (basic + DA).
- 50% of your salary if you live in a 50% city, 40% anywhere else.
From tax year 2026-27 there are eight 50% cities: Delhi, Mumbai, Kolkata, Chennai, Bengaluru, Hyderabad, Pune, Ahmedabad. Bengaluru, Hyderabad, Pune and Ahmedabad used to be at 40%, so people living there now get a bigger exemption.
A worked example
Say your basic is ₹50,000 a month, you receive ₹20,000 of HRA and you pay ₹22,000 in rent:
- HRA received: ₹20,000
- Rent − 10% of basic: ₹22,000 − ₹5,000 = ₹17,000
- 50% of basic (big city): ₹25,000; 40% (other cities): ₹20,000
The lowest is ₹17,000, so that much HRA is tax-free every month: ₹2,04,000 a year. The remaining ₹36,000 is taxed.
| Monthly rent | Tax-free HRA (50% city, yearly) | Tax-free HRA (other cities, yearly) |
|---|---|---|
| ₹12,000 | ₹84,000 | ₹84,000 |
| ₹18,000 | ₹1,56,000 | ₹1,56,000 |
| ₹25,000 | ₹2,40,000 | ₹2,40,000 |
| ₹35,000 | ₹2,40,000 | ₹2,40,000 |
The big catch: old regime only
The new tax regime gives no HRA exemption at all. So HRA only helps if you choose the old regime, and that only makes sense when your total deductions are large enough.
What you'll need to show your employer or the tax department
- A rent receipt for each month, with the landlord's name and signature.
- The landlord's PAN if your rent is more than ₹1 lakh a year.
- Keep bank or UPI records of the payments; they're stronger proof than receipts alone.