HRA exemption Section 10(13A) read with Rule 2A: the three-formula test and the rent receipt evidence

House Rent Allowance is the single largest salary-linked exemption that an Indian salaried employee can claim, and yet it is also the most disputed line in ITR scrutiny. Section 10(13A) of the Income-tax Act 1961 read with Rule 2A of the Income-tax Rules 1962 lays down a three-formula least-of test that turns a generous-sounding allowance into a tightly capped exemption. Get the formula right and a Bengaluru employee on a Rs 18 lakh package can shield Rs 1.92 lakh of HRA from tax in the old regime; get it wrong and Section 143(1) intimations under the Centralised Processing Centre flag the shortfall within weeks of filing.

The stakes have risen for FY 2025-26. The new tax regime under Section 115BAC, now the default since the Finance Act 2023, specifically denies HRA exemption — a fact the old vs new regime calculator bakes into every comparison. Salaried filers who continue under the old regime must therefore document HRA correctly to justify staying out of the default. This morning's tip walks through the statute, the Rule 2A formula, the landlord PAN rule under CBDT Circular 8/2013 dated 10 October 2013, and the rent-to-relative case law that the Mumbai and Ahmedabad tribunals have shaped over the last decade.

What the Section Says

Section 10(13A) exempts "any special allowance specifically granted to an assessee by his employer to meet expenditure actually incurred on payment of rent" up to limits prescribed by the Central Government. Those limits live in Rule 2A of the Income-tax Rules 1962, which sets out the famous three-formula least-of test. The exempt portion is the lowest of (i) the actual HRA received during the relevant period, (ii) rent paid minus 10% of salary, and (iii) 50% of salary for an employee residing in Delhi, Mumbai, Kolkata or Chennai, or 40% of salary for any other location.

"Salary" for Rule 2A is not gross salary or CTC. The Explanation to Rule 2A defines it as basic salary plus dearness allowance, but only to the extent that DA enters into the computation of retirement benefits, plus commission based on a fixed percentage of turnover under the Supreme Court ruling in Gestetner Duplicators v. CIT (1979) 117 ITR 1. Bonuses, overtime, leave travel allowance, conveyance and the HRA component itself are all excluded from "salary" for this purpose. This narrow definition is the single biggest source of HRA computation errors when employees back-compute their exemption from offer letters that bundle everything into a single CTC figure.

The metro-versus-non-metro split is statutorily frozen at four cities — Delhi, Mumbai, Kolkata and Chennai. Bengaluru, Hyderabad, Pune, Ahmedabad and Gurugram all attract the 40% cap regardless of their cost of living. CBDT has not amended this list since Rule 2A was introduced; Section 10(13A) representations from the National Capital Region and the Mumbai Metropolitan Region have been pending with the Direct Tax Code review committee for several Budget cycles.

The documentary trail matters as much as the maths. CBDT Circular 8/2013 dated 10 October 2013 mandates that an employee furnish the landlord's Permanent Account Number to the employer if the annual rent exceeds Rs 1,00,000 — that is Rs 8,334 per month. Where the landlord refuses to share a PAN, the employee must obtain a declaration in the prescribed form along with the landlord's name and address. Without these documents the employer is duty-bound to deny the exemption at the TDS stage under Section 192, even though the employee can still claim it in the ITR if rent receipts and bank transfers establish the payment.

Worked Example

Consider Priya, a product manager in Bengaluru drawing the following monthly figures for FY 2025-26: basic salary Rs 60,000, dearness allowance Rs 12,000 (forming part of retirement benefits), HRA Rs 30,000, special allowance Rs 38,000, and total CTC of Rs 1,80,000 per month or Rs 21,60,000 annually. She pays a rent of Rs 32,000 per month to her landlord in Whitefield, supported by a registered leave-and-licence agreement and bank transfers from her salary account.

The Rule 2A salary base is Rs 60,000 plus Rs 12,000 equals Rs 72,000 per month, or Rs 8,64,000 for the year. The three computations work out as follows. Actual HRA received is Rs 30,000 multiplied by 12, which is Rs 3,60,000. Rent paid minus 10% of salary is Rs 32,000 multiplied by 12 (Rs 3,84,000) minus Rs 86,400 (10% of Rs 8,64,000), giving Rs 2,97,600. The location cap, since Bengaluru is non-metro for Rule 2A purposes, is 40% of Rs 8,64,000, which is Rs 3,45,600.

Priya's exempt HRA is therefore Rs 2,97,600, the lowest of the three. Rs 62,400 of HRA remains taxable in the old regime. If she had been posted to her firm's Lower Parel office in Mumbai with the same package and same rent, the location cap would have been 50% of Rs 8,64,000 or Rs 4,32,000, but the rent-minus-10% figure would still bind, so the exemption would not change. The metro premium only kicks in when the employee's rent is so high that the 40% cap actually limits the exemption.

Because Priya's annual rent of Rs 3,84,000 exceeds Rs 1,00,000, she must furnish her landlord's PAN to her employer for FY 2025-26 — failing which her TDS will be deducted without HRA relief, and she will have to claim a refund through her ITR. The TDS calculator shows what a missed HRA declaration does to the monthly take-home: at her marginal rate of 30%, a denied Rs 2,97,600 exemption raises her annual TDS by Rs 92,832 plus 4% cess, or roughly Rs 8,049 per month. That kind of cash-flow shock is what triggers most mid-year payroll corrections.

Common Mistakes

The first mistake CPC Bengaluru flags relentlessly is using gross salary instead of the Rule 2A base. Employees who plug their full Form 16 Part B "gross salary" figure into the formula inflate the 40% or 50% cap and over-claim the exemption. The fix is to extract basic and pensionable DA from the salary breakup and ignore everything else. The income tax calculator automatically separates these heads when you input the salary components.

The second mistake is claiming HRA under the new tax regime. Section 115BAC(2)(i) read with the Finance Act 2023 specifically lists HRA among the exemptions denied to those taxed under the new default regime, alongside leave travel allowance and Section 80GG. If you are still under the new regime — which from FY 2023-24 is the default unless you opt out by filing Form 10-IEA before the ITR due date — your HRA exemption is zero. The new regime calculator makes this explicit.

The third mistake involves paying rent to a spouse or parent. The Income-tax Department does not prohibit rent paid to relatives, but it scrutinises such claims under the substance-over-form doctrine. Tribunal jurisprudence — including the well-known Bajrang Prasad Ramdharani matter and the Abhay Kumar Mittal v. DCIT order of the ITAT Delhi bench — has allowed exemption where the rent is genuinely paid through bank transfer, the recipient declares the income in their ITR, and the property is legally owned by the recipient. The lack of any of these three pillars usually defeats the claim. Cross-check the family rental against the perquisite tax calculator if the property is also used to offer rent-free accommodation under Section 17(2).

The fourth mistake is treating self-occupied housing as eligible. If you own the home you live in, no rent is being paid and Section 10(13A) cannot apply. The fifth is double-claiming HRA and the Section 24(b) home-loan interest deduction without a defensible reason — possible only where the employee lives in a rented house in one city and owns a let-out or unoccupied property elsewhere, with clear evidence of the geographic separation.

FAQ

Can I claim HRA exemption if I am in the new tax regime?

No. Section 115BAC(2)(i) of the Income-tax Act, as substituted by the Finance Act 2023, denies HRA exemption to taxpayers under the new regime. Section 80GG, the fallback deduction for those without an HRA component, is similarly blocked. To claim HRA for FY 2025-26 you must opt out of the new regime by filing Form 10-IEA on or before the due date of your ITR under Section 139(1).

Is Bengaluru considered a metro for HRA purposes?

No. Rule 2A treats only Delhi, Mumbai, Kolkata and Chennai as metro cities for the 50% cap. Bengaluru, Hyderabad, Pune, Ahmedabad, Gurugram and every other Indian city fall under the 40% cap, even where state legislation or RBI guidelines classify them as metro for unrelated purposes.

What if my annual rent crosses Rs 1 lakh but my landlord refuses to give a PAN?

CBDT Circular 8/2013 dated 10 October 2013 requires you to obtain a signed declaration from the landlord stating that they do not hold a PAN, along with their name and full address. The employer may then process HRA relief, but the Assessing Officer can still question the claim at scrutiny if the landlord's identity cannot be established.

Can I pay rent to my parents and claim HRA?

Yes, where the arrangement is genuine. The property must be owned by the parent, the rent must travel by bank transfer at a market rate, and the parent must declare the rental income under "Income from House Property" in their own ITR. Cash payments and round-tripping arrangements have repeatedly been disallowed in tribunal rulings.

What happens if I forget to submit the rent receipts to my employer?

Your TDS will be deducted as if you had no HRA exemption, but you may still claim it in your ITR with the supporting documentation. Reconcile the difference using the steps in our Section 143(1) intimation guide and your AIS and Form 26AS reconciliation walkthrough before filing.

Can I claim both HRA and Section 24(b) home-loan interest in the same year?

Yes, but only where the home you own is genuinely not the home you rent. A common pattern is owning a flat in your hometown that is either let out or vacant, while renting in your current work city. Keep agreements, electricity bills and address proofs to demonstrate the separation if asked.

Where can I read the statute and rule directly?

The consolidated Income-tax Act 1961 is hosted by the Income Tax Department at incometax.gov.in and the Income-tax Rules 1962 at indiacode.nic.in. Always cross-check the latest amendments — Section 10(13A) itself has been stable, but the new regime carve-out under Section 115BAC has been amended every Finance Act since 2020.