HRA exemption rules: Income Tax Department explains how rent, salary, and city determine tax savings

The Income Tax Department on Friday clarified that claiming house rent allowance (HRA) exemption does not automatically translate into significant tax savings, calling such assumptions a misconception and urging taxpayers to make informed decisions while planning their taxes.

In a post on X (formerly Twitter), the department said, “HRA exemption does not necessarily result in similar tax savings." It also said that informed taxpayers make better financial and compliance decisions.

House Rent Allowance (HRA) exemption allows salaried employees to reduce their taxable income on rental expenses. It is a key component of a person's salary and a portion of it can be claimed as tax exempt under specific conditions.

What determines the HRA?

According to the Income Tax Department, the actual benefits from HRA exemption largely depends on how much rent you paid, your salary structure, and whether you live in a metro or non-metro city.

The HRA exemption is not a fixed amount but is calculated as the lowest of three components, which include:

• The actual HRA received from employer
• 50% of basic salary those living in metro cities or 40% for non-metros
• The rent paid minus 10% of basic salary.

In simple terms, the tax benefit that can claim as HRA exemption is restricted to whichever of these three amounts is the smallest, according to ClearTax. Taxpayers must note metro cities include Delhi, Chennai, Mumbai, Kolkata, Bengaluru, Pune, Hyderabad, and Ahmedabad.

Who can claim HRA exemption?

There are certain conditions under which a salaried individual can claim HRA exemption under the income tax rules. Here are some of these rules:

• Tax regime: HRA exemption is only available under the old tax regime.
• Residential status: The person must be residing in rented accommodation. Their rent payment must be verified by receipts.
• Property ownership: The individual must not own the house where they reside.
• Ownership exception: If you own a home in a different city, HRA can still be claimed for the rented place in the city where you are employed.
• Parents' home: Rent paid to parents can be claimed if they are the owners, provided it is disclosed as rental income in the parent's ITR.
• Documentation: Rent receipts, a rental agreement, Form 12BB, salary slip where HRA is incorporated, and the landlord's PAN (required if annual rent exceeds ₹1 lakh) must be provided.

What to do if landlord's PAN is not available?

If the landlord's PAN is not available, then a self-declaration along with their name and address must be submitted, stating that the owner of the property does not have a PAN, as per circular No. 8/2013 dated 10 October 2013.

According to Priyank Sharma, a Sebi-registered research analyst, the rule is meant to improve transparency and prevent misuse of rent-related tax benefits, such as HRA, in the Annual Information System.

“In many cases, false rent claims were made using non-existent landlords or inflated rent amounts. By requiring the landlord’s PAN when annual rent exceeds ₹1 lakh, the tax authorities can verify whether the rental income is being correctly reported by the landlord,” he told Mint.

Penalty for misreporting

Some people may misuse the HRA exemption benefit by submitting fake rent receipts. Such cases may attract legal scrutiny and massive penalties. If a taxpayer does not properly disclose the landlord-tenant relationship or fails to provide the required details, the rent claim, such as HRA, can be disallowed during assessment, leading to higher taxable income and additional tax liability.

“The tax authorities may also scrutinise the claim, and if it is found to be incorrect or false, a penalty can be imposed under Section 270A of the Income Tax Act, which ranges from 50% of the tax payable on under-reported income to 200% in cases of misreporting,” Sharma said.

However, the 2026 budget extended immunity from prosecution for misreporting if taxpayers pay 100% of the tax due and an additional penalty.