HRA
House Rent Allowance (HRA) is a component of an employee's salary specifically meant to cover rental housing expenses. Under the old tax regime, a portion of HRA can be claimed as tax-exempt under Section 10(13A) — the new regime does not allow this exemption.
Understanding HRA
HRA is one of the largest tax-saving components for salaried metro residents — often saving ₹50,000–₹1.5 lakh in tax per year for someone in the 20–30% slab. The exemption formula uses three numbers and picks whichever is lowest, so the exemption rarely equals the full HRA you receive.
Metro cities for HRA purposes are Mumbai, Delhi, Kolkata, Chennai (Bengaluru and Hyderabad are NOT in the list, despite being effectively metros). Living in a non-metro caps the second exemption component at 40% of basic salary instead of 50%.
Why it matters
For metro renters, HRA alone often justifies staying in the old tax regime. Combined with Section 80C and 80D, an HRA-claiming taxpayer in a metro can easily save ₹1.5–2 lakh per year in tax — substantially more than the new regime's lower slab rates would save without these deductions. Always run both regimes through a calculator before choosing.
Example
Vikram earns ₹15 lakh CTC in Mumbai with ₹4 lakh HRA, ₹6 lakh basic. He pays ₹30,000/month rent (₹3.6 lakh/year). His exemption is the lowest of: actual HRA ₹4 lakh / 50% of basic ₹3 lakh / rent minus 10% of basic ₹3 lakh. So ₹3 lakh is exempt and ₹1 lakh is taxed. At 30% slab, that exemption saves ₹93,600 in tax.
Vikram earns ₹15 lakh CTC in Mumbai with ₹4 lakh HRA, ₹6 lakh basic. He pays ₹30,000/month rent (₹3.6 lakh/year). His exemption is the lowest of: actual HRA ₹4 lakh / 50% of basic ₹3 lakh / rent minus 10% of basic ₹3 lakh. So ₹3 lakh is exempt and ₹1 lakh is taxed. At 30% slab, that exemption saves ₹93,600 in tax.