How HRA Exemption Works in 2026-27: A Complete Guide

If part of your salary is House Rent Allowance (HRA) and you pay rent, some of that HRA can be tax-free, but only in the old tax regime and only if you work it out correctly. From tax year 2026-27 two things changed: the 50% limit now covers eight cities instead of four, and the declaration you give your employer is Form 124 instead of Form 12BB. This guide covers the rule, the change and the paperwork.

What HRA exemption is

HRA is a salary component meant to help with rent. By default it is taxable like any other pay. The exemption lets you take part of it out of your taxable income if you actually pay rent for the house you live in. It was section 10(13A) of the 1961 Act and carried over into the Income-tax Act, 2025.

Two conditions come first:

• It works only in the old regime. In the new regime, which is the default, all of your HRA is taxable.
• You must genuinely pay rent. Living in your own house, or with family without a real rent arrangement, means no exemption.

The three-limb rule

Your tax-free HRA is the least of:

1. The HRA your employer actually paid you for the year.
2. Rent paid minus 10% of salary, where salary means basic plus DA.
3. 50% of basic plus DA if you live in one of the eight listed cities, or 40% anywhere else.

The smallest of the three is exempt; the rest of your HRA is added to taxable salary.

The 50% cities from 2026-27

For rent paid from 1 April 2026, the 50% list is Delhi, Mumbai, Kolkata, Chennai, Bengaluru, Hyderabad, Pune and Ahmedabad. The Income-tax Rules, 2026 added the last four. Gurugram, Noida, Navi Mumbai, Thane and every other city stay at 40%. For FY 2025-26 and earlier years, only the first four cities get 50%.

What counts is where the rented house is, not where your office is. The metro vs non-metro HRA guide shows what the change is worth for someone in Bengaluru.

A worked example

You live in Mumbai with this structure:

• Basic salary: ₹40,000 a month (₹4,80,000 a year)
• HRA received: ₹16,000 a month (₹1,92,000 a year)
• Rent paid: ₹18,000 a month (₹2,16,000 a year)

1. Actual HRA received: ₹1,92,000
2. Rent minus 10% of basic: ₹2,16,000 minus ₹48,000 = ₹1,68,000
3. 50% of basic: ₹2,40,000

The least is ₹1,68,000, which is tax-free. The other ₹24,000 of HRA is taxed. At the 30% slab the exemption saves about ₹52,000 in tax for the year. The HRA exemption calculator does this for your own numbers.

Documents you need

Employers usually ask for proof between December and February:

• Rent receipts, monthly or quarterly, signed by the landlord. A cash receipt above ₹5,000 needs a revenue stamp. The rent receipt generator makes a full year in one PDF.
• The rent agreement, which most employers ask for.
• The landlord's PAN if your rent passes ₹1,00,000 a year, which is about ₹8,334 a month. Without a PAN, a signed declaration from the landlord.
• Bank statements showing rent leaving your account. Not always asked for, but the best evidence if the claim is ever questioned.

You declare all of this on Form 124, which replaced Form 12BB from April 2026. It also asks for your relationship with the landlord, which matters if you pay rent to a parent. The Form 124 guide covers each field.

Old regime or new regime

• Old regime: HRA exemption, plus section 123 (the old 80C), home loan interest and the rest.
• New regime: lower rates, but HRA is fully taxable and most deductions are gone.

High rent relative to salary, plus other deductions, can make the old regime the better deal, and the wider city list tips a few more people that way this year. Don't guess: run both regimes through the income tax calculator and pick the lower bill.

Common mistakes

• Using last year's city list. From 2026-27, Bengaluru, Hyderabad, Pune and Ahmedabad are 50% cities; for FY 2025-26 they are not.
• Using gross salary instead of basic plus DA. Both the 10% subtraction and the 50% or 40% cap use basic plus DA only.
• Missing the proof deadline. Your employer then deducts full TDS. You can still claim in your return, but be ready to back it up.
• No landlord PAN above ₹1 lakh of rent. Payroll will reject the claim.
• Claiming HRA while living in your own house. An easy catch.
• Receipts without real payments. Rent to family can be legitimate only if the money moves and they declare it; see paying rent to parents.

If your salary has no HRA component

The HRA exemption does not apply, but the separate rent deduction that was section 80GG might. It is smaller, old regime only, and capped at ₹5,000 a month.

Frequently asked questions

How is HRA exemption calculated?

It is the least of the HRA you received, rent paid minus 10% of basic plus DA, and 50% of basic plus DA in the eight listed cities or 40% elsewhere. The smallest is exempt and the rest of your HRA is taxable.

Which cities get 50% HRA exemption from 2026-27?

Delhi, Mumbai, Kolkata, Chennai, Bengaluru, Hyderabad, Pune and Ahmedabad, for rent paid from 1 April 2026. All other cities are capped at 40%.

Can I claim HRA exemption in the new tax regime?

No. The exemption works only in the old regime. In the new regime HRA is fully taxable.

What documents are required to claim HRA?

Rent receipts, the rent agreement, the landlord's PAN if rent is above ₹1 lakh a year, and ideally bank statements showing the payments. You declare them to your employer on Form 124.

What replaced Form 12BB?

Form 124, from 1 April 2026. It is the same declaration of rent, investments and home loan interest you give your employer, and it now asks for your relationship with the landlord.

Can I claim HRA if I pay rent to my parents?

Yes, if it is genuine: your parent owns the property, the rent actually moves to their account, and they declare it as income in their own return.

Which salary is used for the HRA calculation, basic or gross?

Basic plus dearness allowance, never gross or CTC. Using gross is the most common arithmetic mistake in HRA claims.