The Three-Condition Formula
Section 10(13A) read with Rule 2A of the Income Tax Rules specifies that HRA exemption is the least of: (1) actual HRA received from the employer during the year; (2) rent actually paid minus 10% of salary (basic salary + dearness allowance forming part of retirement benefits); (3) 50% of salary for employees residing in Delhi, Mumbai, Kolkata, or Chennai, and 40% of salary for all other cities. The exemption is computed on a monthly basis if HRA or rent changes during the year. The non-exempt portion of HRA is added to taxable salary.
Metro vs Non-Metro Classification
Only four cities qualify as "metro" for HRA purposes: Delhi (including NCR is debated — strictly only Delhi), Mumbai, Kolkata, and Chennai. All other cities — including Bengaluru, Hyderabad, Pune, Ahmedabad, and all other tier-1 and tier-2 cities — are treated as non-metro, attracting the 40% limit. This is a common source of error: Bengaluru-based employees often incorrectly apply the 50% limit. The city of residence (where you pay rent) determines the percentage, not the city of your employer's office.
Documentation Requirements
To claim HRA exemption, you need: rent receipts for each month (showing landlord's name, address, amount, and signature); a rent agreement; and the landlord's PAN if annual rent exceeds ₹1 lakh. Rent receipts should ideally be on ₹1 revenue stamp for amounts above ₹5,000 per receipt (though this is not strictly enforced everywhere). Bank transfer records are the strongest evidence — avoid cash rent payments. Submit these to your employer for TDS computation; keep originals for ITR filing and potential scrutiny.
HRA and Home Loan: Can You Claim Both?
Yes, you can claim both HRA exemption and home loan interest deduction under Section 24(b) simultaneously — but only if you genuinely pay rent at one location and own a property at a different location (e.g., you own a house in Chennai but work and rent in Bengaluru). You cannot claim HRA exemption for a house you own and live in. If you own a house in the same city where you work but live in a rented accommodation for genuine reasons, both claims are technically possible but will attract scrutiny — maintain strong documentation.