The three tests, one by one
Basic pay ₹80,000 a month (no DA), HRA ₹40,000, rent ₹35,000, for all 12 months of FY 2026-27, old tax regime. “Salary” for HRA means basic + DA only.
| Test (for 12 months) | Amount |
|---|---|
| 1. Actual HRA received | ₹4,80,000 |
| 2. Rent paid ₹4,20,000 − 10% of salary ₹96,000 | ₹3,24,000 |
| 3. 50% of salary ₹9,60,000 | ₹4,80,000 |
| Tax-free HRA = the lowest | ₹3,24,000 |
- Test 1 is simply what your employer paid you as HRA.
- Test 2 is the rent you paid, minus 10% of your salary — the part of the rent the law expects you to bear yourself.
- Test 3 is 50% of salary because Mumbai is one of the eight 50% cities.
The lowest is test 2, so ₹3,24,000 (₹27,000 a month) is tax-free. The rest of your HRA, ₹1,56,000, is added to your taxable salary. At the 30% slab plus 4% cess, the exemption saves you about ₹1,01,088 in tax.
How your rent changes the answer
Same salary and HRA, different rents:
| Monthly rent | Test 2 (yearly) | Tax-free HRA | Taxable HRA |
|---|---|---|---|
| ₹20,000 | ₹1,44,000 | ₹1,44,000 | ₹3,36,000 |
| ₹30,000 | ₹2,64,000 | ₹2,64,000 | ₹2,16,000 |
| ₹35,000 | ₹3,24,000 | ₹3,24,000 | ₹1,56,000 |
| ₹40,000 | ₹3,84,000 | ₹3,84,000 | ₹96,000 |
| ₹50,000 | ₹5,04,000 | ₹4,80,000 | ₹0 |
| ₹60,000 | ₹6,24,000 | ₹4,80,000 | ₹0 |
Once your rent reaches ₹48,000 a month, test 2 catches up with your HRA (₹4,80,000) and the whole HRA becomes tax-free. Paying more rent beyond that does not increase the exemption.
What if you also get DA?
Dearness allowance counts as “salary” for HRA only if your terms of employment say it forms part of retirement benefits. That is common in government and PSU jobs and rare in private companies. If it applies, tick the box in the calculator and enter your DA: tests 2 and 3 both change, because 10% and 50% of a bigger salary are bigger numbers.
Old regime or new regime?
HRA is one of the biggest reasons people stay in the old regime. But the new regime has lower slab rates and a higher standard deduction, so the right choice depends on all your deductions together (HRA, 80C, home loan interest, and so on). Our income tax calculator compares both in a minute; pick whichever leaves you more money.
Paperwork made easy
- Rent receipts or a rent agreement, plus bank transfer records, are the best proof.
- Landlord’s PAN is needed here, because the rent is above ₹1,00,000 a year.
- Declare to your employer early in the year so less TDS is deducted each month. If you forgot, you can still claim the exemption when you file your return.
FAQ
How is HRA exemption calculated for Mumbai?
Take the lowest of: actual HRA, rent minus 10% of basic + DA, and 50% of basic + DA. Mumbai is a 50% city in every year.
What is the tax-free HRA on ₹80,000 basic, ₹40,000 HRA and ₹35,000 rent?
For 12 months: HRA ₹4,80,000; rent minus 10% of salary ₹4,20,000 − ₹96,000 = ₹3,24,000; 50% of salary ₹4,80,000. The lowest is ₹3,24,000, and ₹1,56,000 is taxable.
How much tax does that HRA exemption save?
About ₹1,01,088 a year at the 30% slab plus 4% cess, in the old regime.
Sources (checked 5 Nov 2026): Rule 279, Income-tax Rules, 2026 (incometaxindia.gov.in/w/rule-279-1); Income-tax Act, 2025 Schedule III Table Sl. No. 11; CBDT notification of the Income-tax Rules, 2026 dated 20 Mar 2026, in force 1 Apr 2026; Income-tax Act, 1961 s.10(13A) and Rule 2A (FY 2025-26). Cross-checked with ThePrint, Upstox and Mondaq reports on the final rules.