Payroll and HR glossary
HRA
House rent allowance
HRA is the part of salary paid towards an employee's rent. Under the old tax regime part of it is tax-free, the lowest of HRA received, rent minus 10% of salary, and 50% of salary in eight large cities (40% elsewhere). Under the new regime it is fully taxable.
Why it matters to your business
HRA is usually one of the largest parts of a salary after basic pay. For employees on the old regime, the exemption can save a meaningful amount of tax each year, and they expect the employer to reflect it in monthly TDS. For you, it has to be worked out correctly and backed by rent details, because an exemption you allow without evidence can come back to you as short-deducted tax.
How it works
As of September 2026, for an employee on the old regime who pays rent:
- Salary for this purpose means basic pay and dearness allowance (where it counts for retirement benefits), plus any commission fixed as a percentage of turnover.
- The exempt amount is the lowest of:
- the actual HRA received;
- rent paid minus 10% of salary;
- 50% of salary in Mumbai, Delhi, Kolkata, Chennai, Bengaluru, Hyderabad, Pune or Ahmedabad, and 40% elsewhere.
- The rest of the HRA is taxable salary.
- No exemption is available to an employee living in their own house or not paying rent.
An example
An employee in Mumbai on the old regime earns basic pay and dearness allowance of ₹40,000 a month, receives HRA of ₹20,000 and pays rent of ₹18,000. For the year:
| Amount | |
|---|---|
| Actual HRA received | ₹2,40,000 |
| Rent paid minus 10% of salary (₹2,16,000 less ₹48,000) | ₹1,68,000 |
| 50% of salary | ₹2,40,000 |
| Exempt HRA (the lowest) | ₹1,68,000 |
| Taxable HRA | ₹72,000 |
Common mistakes
- Allowing the exemption to employees on the new regime.
- Using 40% for Bengaluru, Hyderabad, Pune or Ahmedabad from tax year 2026-27.
- Accepting rent above ₹1,00,000 a year without the landlord’s PAN.
Questions about HRA
Which cities get the 50% HRA limit?
Mumbai, Delhi, Kolkata and Chennai, and from tax year 2026-27 also Bengaluru, Hyderabad, Pune and Ahmedabad, under the Income-tax Rules, 2026. Other places use 40% of salary.
Is HRA exempt under the new tax regime?
No. The new regime, which is the default, does not allow the HRA exemption, so the whole allowance is taxable. An employee who pays high rent may compare both regimes before choosing.
When is the landlord's PAN needed?
When the rent paid in the year exceeds ₹1,00,000. The employee gives it to the employer with the rent details in Form 124, which replaced Form 12BB from 01-04-2026.
Does HRA count as wages under the labour codes?
HRA is one of the allowances excluded from wages, but it counts towards the 50% test. If excluded allowances together exceed half of total pay, the excess is added to wages for PF, gratuity and other statutory purposes.
Updated .