The Central Board of Direct Taxes (CBDT) has introduced significant changes to House Rent Allowance (HRA) rules, expanding benefits for taxpayers in several major urban centres while also tightening compliance requirements. CA Ruchika Bhagat, MD, Neeraj Bhagat & Co. explains what has changed and what the taxpayers should check if they are claiming HRA.
What is House Rent Allowance?
House Rent Allowance is a salary component provided by employers to help employees meet rental housing expenses. Under Section 10(13A) of the old tax regime, a salaried employee living in rented accommodation can claim HRA as a partial tax exemption under the old income tax regime.
House Rent Allowance is an integral part of your salary structure, provided to cover the cost of accomodation. This is especially provided in big cities, where the rental expense is usually high.
Though HRA cannot be claimed if you do not live in rental premises, you can claim HRA and home loan together, on satisfaction of certain conditions.
HRA cannot be claimed under the new tax regime.
HRA Under the New Metro City Exemption: What Taxpayers Need to Know
The Government has expanded the list of metro cities for House Rent Allowance (HRA) purposes. In addition to Delhi, Mumbai, Kolkata, and Chennai, Bengaluru, Hyderabad, Pune, and Ahmedabad are now treated as metro cities. This change can help eligible salaried employees claim a higher HRA exemption under the Old Tax Regime.
HRA exemption is calculated as the least of the following:
- Actual HRA received from the employer.
- Rent paid minus 10% of salary.
- 50% of salary for metro cities (40% for non-metro cities).
The key difference between the old and new rules is that employees residing in the newly added metro cities can now use 50% of salary instead of 40% while calculating HRA exemption. This may result in a larger portion of HRA becoming tax-free.
Before claiming HRA, taxpayers should ensure they:
Have opted for the Old Tax Regime, as HRA exemption is not available under the New Tax Regime.
- Maintain rent receipts and a valid rent agreement.
- Obtain the landlord’s PAN if annual rent exceeds ₹1 lakh.
- Keep proof of rent payments such as bank transfers or UPI records.
- Verify that HRA details are correctly reflected in Form 16.
“The primary benefit of the revised rule is higher tax savings for employees living in Bengaluru, Hyderabad, Pune, and Ahmedabad. A larger HRA exemption reduces taxable income, lowering overall tax liability. The change also better reflects the high rental costs in these growing urban centres, providing meaningful relief to salaried taxpayers,” the expert says