The HRA Loophole: How Much of Your Rent Is Actually Tax-Free?

Rohan, 28, Bengaluru, Rs. 16 lakh CTC, pays Rs. 32,000 monthly rent to a friend. He claims HRA. Wrong. His friend is not declaring the income. Rohan gets a notice 18 months later and pays Rs. 78,000 back with interest. HRA is the second-most-claimed deduction and the second-most-botched.

By the end, you will know exactly how much HRA you can claim and the three documentation mistakes that unravel it.

Read this first

HRA lives only in the old regime

The three-number formula

HRA exemption under section 10(13A) equals the LOWEST of three: (1) actual HRA received from employer, (2) rent paid minus 10% of basic salary, (3) 50% of basic in a metro city (40% non-metro). Whichever is smallest becomes exempt. The rest is taxable as salary.

Metro claim

Rs. 2,40,000

50% basic cap

Non-metro claim

Rs. 1,92,000

40% basic cap

The four cities that count as metro

Only Mumbai, Delhi, Chennai, and Kolkata qualify for 50% of basic. Bengaluru, Hyderabad, Pune, Gurugram. All count as non-metro for HRA purposes, even when rents there exceed Delhi or Mumbai. This trips up every Bengaluru IT hire.

Rent > Rs. 1 lakh a year needs landlord PAN

Claim above Rs. 1L (Rs. 8,333/month) and you must provide landlord PAN on Form 12BB. No PAN to claim disallowed + notice. If landlord refuses PAN, get a declaration that their income is below taxable limit.

Paying rent to family counts. With two riders

You can pay rent to parents who own the property, but (a) they must actually own it, (b) they must declare the rental income, (c) you must actually pay via bank transfer. Cash entries + no declaration = audit trail broken.

No HRA in new regime

Section 115BAC (new regime) removes section 10(13A) exemption entirely. If HRA is 20% of your pay, staying on old regime is almost always the better call.

Key Takeaways

HRA exempt = minimum of (actual HRA, rent minus 10% of basic, 50/40% of basic).
Metro = only Mumbai / Delhi / Chennai / Kolkata. Bengaluru is non-metro.
Rent > Rs. 8,333/month to get landlord PAN or the claim fails.
Rent to parents is allowed if the money actually flows and they declare it.
HRA does not exist in the new regime. A renter is almost always better on old.