House Rent Allowance received by a salaried employee living in rented accommodation is exempt to the extent of the least of three limbs under Section 10(13A) of the Income-tax Act 1961 read with Rule 2A: (1) the actual HRA received; (2) rent paid in excess of 10% of salary; and (3) 50% of salary where the accommodation is in Delhi, Mumbai, Kolkata or Chennai, or 40% of salary anywhere else. Whatever HRA is not exempt is taxed as salary.
"Salary" for this purpose has a precise meaning: basic salary, plus dearness allowance only if it forms part of retirement benefits under the terms of employment, plus commission only where it is paid as a fixed percentage of turnover (the Supreme Court's Gestetner Duplicators test). Bonus, special allowance, employer PF contribution and the broader CTC are all excluded. The computation is strictly for the period the accommodation is occupied and rent is paid — if salary, rent, HRA or the city changes during the year, the test is applied separately for each period rather than on crude annual totals.
Two things changed around the exemption recently. First, the regime question: the exemption is available only under the old regime — the default new regime for FY 2026-27 taxes HRA in full, so the real decision is a regime comparison, not an HRA computation. Second, the statute: from 1 April 2026 the Income-tax Act 2025 replaces the 1961 Act, and the HRA exemption now sits at Schedule III (S. No. 11) instead of Section 10(13A) — the Rule 2A mechanics are unchanged, but citations in working papers must move. Our Income-tax Act 2025 section mapper translates the old references.
An employee in Mumbai draws basic + DA (forming part) of ₹60,000 per month, receives HRA of ₹30,000 per month, and pays rent of ₹25,000 per month for the full year.
