House Rent Allowance (HRA) under Income Tax Act, 1961 vs. 2025 [Old vs New Tax Act Series]

House Rent Allowance (HRA) is a part of salary that employers pay to employees to meet a portion of their housing expenses.

Under the Income Tax Act, 1961, the HRA component is partially or wholly exempt from taxable salary under Section 10(13A). However it is subject to conditions and computation under Rule 2A of the Income-tax Rules, 1962.

Relevant Statutory Provisions

• Section 10(13A), Income Tax Act, 1961: Exemption of HRA to salaried employees.
• Rule 2A, Income Tax Rules, 1962: Quantification of HRA exemption (three-limb test).
• Section 115BAC, Income Tax Rules, 2025: Governs taxation under the New Tax Regime and restricts certain exemptions, including HRA.

HRA Eligibility Under Old Tax Regime

Under the Old Tax Regime, HRA exemption can be only availed if all of the following conditions are satisfied:

1. The taxpayer is a salaried employee;
2. HRA is actually received as part of salary;
3. Rent is actually paid for residential accommodation occupied during the year;
4. The rented property is not owned by the employee.

Thereby, documentation such as rent receipts, rental agreement, and landlord’s PAN, if annual rent exceeds ₹1 lakh is required to substantiate the claim.

Calculation of HRA Exemption under Old Regime

According to Rule 2A, the exempt portion of HRA is the least of the following three amounts:

1. Actual HRA received from the employer.
2. Rent paid minus 10% of salary, where salary includes basic pay + dearness allowance, if applicable.
3. 50% of salary, if residing in a metro city like Delhi, Mumbai, Kolkata, Chennai or 40% of salary, for other cities.

This three-limb test ensures that only a reasonable portion of HRA is exempted.

Taxability Under the New Tax Regime

Section 115BAC, which became the default tax regime from Assessment Year 2024–25 has several exemptions and deductions removed for taxpayers opting for this regime. HRA exemption under Section 10(13A) is one such benefit that is no longer available in the New Regime.

Accordingly, if an individual opts for the New Tax Regime, the entire HRA received from the employer is fully taxable as salary income.

Judicial Precedents

• The ITAT Ahmedabad Bench in the case of Nikhil Vinodchandra Shah vs The Dy. CIT [2025 TAXSCAN (ITAT)1345] allowed HRA exemption of ₹7.8 lakh to a salaried employee, criticizing the Centralized Processing Centre (CPC) for mechanically disallowing the claim in an intimation under Section 143(1). The Tribunal observed that the HRA claim was correctly computed under Rule 2A, and the CPC’s adjustment was not in line with statutory provisions.

• The ITAT Pune Bench in the case of Pavan Gopal Chotiya vs ITO [2025 TAXSCAN (ITAT) 1663] held that where a rent agreement was executed in the joint names of the assessee and his brother, the HRA exemption was restricted to 50% of the rent, even though the assessee claimed to have borne the entire rent. The Assessing Officer and Commissioner (Appeals) restricted the deduction accordingly, and the Tribunal upheld that restriction.

• The ITAT Mumbai Bench in the case of Meena Vaswani vs ACIT held that HRA exemption cannot be allowed where rent was paid to the taxpayer’s mother, and the arrangement was found to be a sham transaction lacking substantive evidence of genuine tenancy. In that case, the assessee failed to produce a leave and license agreement, corroborative tenancy evidence, clear money trail, or credible proof of residence, leading the Tribunal to confirm denial of exemption under Section 10(13A).

Illustration

Facts:

• Employee resides in Mumbai (metro city).
• Basic + DA (annual): ₹4,20,000
• HRA received: ₹1,80,000
• Annual rent paid: ₹1,44,000

Computation under Old Regime:

Exempt HRA = ₹1,02,000 (least of three) Taxable HRA = ₹1,80,000 – ₹1,02,000 = ₹78,000

Under New Tax Regime: The entire HRA of ₹1,80,000 is taxable since exemption under Section 10(13A) is not available.

Documentation

Taxpayers should maintain:

• Valid rent agreement
• Rent receipts
• Bank statements/UPI proofs showing rent payments
• Landlord’s PAN when required
• Consistency between rent receipts and rent agreement

HRA remains a significant tax-saving provision under the Old Tax Regime and is governed by a well-settled statutory framework under Section 10(13A) and Rule 2A of the Income-tax Rules. Actual rent payment, residence in rented accommodation, and correct calculation are critical to claim exemption.

Under the New Tax Regime HRA exemption is not available, and the entire allowance forms part of taxable salary. Taxpayers should analyze which regime yields a better net tax outcome based on their individual salary structure and rent commitments.

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