HRA Exemption Calculation 2026: Formula, 8-City 50% Rule & Worked Examples

The exemption is the lowest of three tests

For Tax Year 2026–27, HRA exemption is the least of the eligible tests under the applicable tax framework. The 2026 rules expanded the higher 50% salary category to eight cities: Mumbai, Kolkata, Delhi, Chennai, Hyderabad, Pune, Ahmedabad and Bengaluru; other locations use 40%. HRA exemption matters only where the relevant regime and conditions permit it, so always match the calculation to the tax year you are filing.

What changed from 1 April 2026

• Use the least of actual HRA, rent minus 10% of salary, and 50%/40% of salary.
• The eight-city rule applies from 1 April 2026 under the Income-tax Rules, 2026.
• For earlier periods such as FY 2025–26, do not retroactively apply the new eight-city list.
• Salary for the HRA formula has a defined tax meaning; do not automatically use gross CTC.

The 2026 HRA formula

A useful way to calculate HRA is to compute all three limits for the relevant period and choose the smallest. If salary, rent or city changes during the year, split the year into separate periods instead of averaging everything blindly.

Worked example: Bengaluru employee

Assume monthly basic salary of ₹60,000, HRA of ₹24,000 and rent of ₹28,000 for all 12 months. For this illustration, eligible salary is ₹7.20 lakh for the year. Bengaluru is in the 50% group from 1 April 2026.

Here, the rent test is the smallest figure, so ₹2.64 lakh is the illustrative exemption. The balance HRA, if any, remains taxable salary subject to the applicable rules.

When salary or rent changes mid-year

Suppose you move from Jaipur to Pune in October and your rent also increases. Calculate April–September using Jaipur’s applicable city percentage and October–March using Pune’s percentage. The same period-by-period method should be used after a salary revision or job change. This prevents a common error where a full-year metro percentage is applied to months that were actually spent elsewhere.

What can make your result different?

• Tax regime chosen and whether HRA exemption is available under it.
• The exact tax definition of salary for the HRA computation.
• Whether rent was actually paid and can be substantiated.
• Change of city, employer, salary or HRA during the year.
• Employer payroll cut-off versus the final computation in the return.

Why you may still see four-city HRA guidance

Some Income Tax Department help pages continue to summarise the older four-city Rule 2A treatment. For Tax Year 2026–27, the operative Income-tax Rules, 2026 use Rule 279, which lists Mumbai, Kolkata, Delhi, Chennai, Hyderabad, Pune, Ahmedabad and Bengaluru in the 50% group. The practical rule is simple: use the legal provision that applies to the tax period you are filing, not a legacy summary written for an earlier period.

Build the calculation from your own payslips

Create a small period-wise worksheet with four inputs: eligible salary, HRA received, rent paid and residential city. Run the three statutory limits for each period and retain the lowest figure. This makes the computation easy to reconcile with payslips and avoids applying a full-year assumption after a mid-year change.

Where HRA calculations go wrong

• Applying the eight-city 2026 list to FY 2025–26.
• Entering gross CTC instead of the salary base defined for the HRA rule.
• Using one annual calculation after a city, rent, salary or HRA change.
• Treating the city percentage as the exemption instead of taking the least of all three tests.
• Assuming HRA is exempt under every tax regime.

Calculate period by period

Frequently asked questions