House Rent Allowance (HRA), explained for Indian employers
House Rent Allowance, or HRA, is a salary head paid to help an employee meet the cost of rented housing. Under the old tax regime part of it can be exempt from tax under Section 10(13A). Under the new regime that exemption is gone, so HRA is taxed like ordinary pay.
If you run a small company, HRA is one of the heads you set when you write the offer. It sits below Basic and it carries a specific tax rule that the employee, not you, claims later. Your part is to structure the number cleanly, put it on the payslip, and run correct TDS. This page walks through what HRA is, how the exemption is worked out, and where your job ends and the employee's begins.
What is House Rent Allowance?
HRA is a cash component of salary meant to offset rent. It is not a reimbursement of a bill and it is not tied to a lease you hold; it is a fixed monthly figure that you fix when you build the pay structure. Almost every private salary in India carries an HRA line, and it usually sits second in the ledger after Basic.
The reason HRA gets so much attention is the tax rule attached to it. Where an employee actually pays rent and is on the old regime, a slice of HRA escapes tax under Section 10(13A) read with Rule 2A. That slice is not the whole allowance. It is capped by a formula, and the formula is what most of this page is about. When you plan a salary structure, the size of the HRA line quietly shapes how much of an employee's pay is taxable, so it is worth setting with some care.
One thing to hold onto from the start. You do not grant the exemption. You put HRA in the salary structure, deduct correct TDS, and issue the payslip. The exemption is claimed by the employee in their own return, with rent receipts to back it. Keep that demarcation clear and the rest falls into place.
How is the HRA exemption calculated?
Under the old regime the exempt amount is the least of three figures. You take all three, and the smallest one is what is exempt. Anything above it is taxable.
| Figure | What it means |
|---|---|
| Actual HRA received | The HRA amount you actually paid the employee in the year. |
| 40 or 50 percent of salary | 40 percent of salary, or 50 percent if the rented home is in Mumbai, Kolkata, Delhi or Chennai. |
| Rent minus 10 percent of salary | The rent the employee paid, less 10 percent of salary. |
The smallest of those three is the exempt HRA. So a generous HRA line does not automatically mean a large exemption; the rent actually paid and the salary base can hold it down. An employee who pays little rent will find the third figure does the capping. An employee in a costly metro flat may find the second figure binds.
The metro point is worth a second look, since it is the most common thing people get wrong. The 50 percent rate applies only to homes in Mumbai, Kolkata, Delhi or Chennai. Every other city, however large, sits at 40 percent. The city that counts is where the rented home is, not where your office is registered.
What counts as salary for HRA?
This is the part that trips up a lot of pay runs. In the HRA formula, salary does not mean CTC and it does not mean gross pay. It means Basic pay plus the dearness allowance that forms part of retirement benefits. So the base is Basic plus DA, and nothing else. HRA itself is not in it. Special allowance is not in it. Other heads are not in it.
For most private SMEs the practical answer is simpler still. Dearness allowance is largely a government and public sector element, and the majority of private employers do not run a DA line at all. If your structure has no DA, the salary base for HRA is just Basic. That is the common case, and it is the one to plan around.
Because the base is Basic plus DA, the height of your Basic line drives both the exemption and the statutory sums. A thin Basic shrinks the HRA exemption and shrinks EPF and gratuity too. This is why the split between Basic, HRA and special allowance matters, and why it repays a careful look. The CTC versus in hand calculator is a quick way to see how a given split lands before you commit it to an offer.
When can an employee not claim HRA?
The exemption is built on rent actually paid. Take the rent away and the exemption goes with it. There is no HRA exemption if the employee owns the home they live in, or if they pay no rent. You can still carry HRA as a salary head on the payslip in those cases; the head exists, but the tax relief does not, and that employee is taxed on the full HRA.
There is also a reporting threshold. If the rent paid exceeds Rs 1,00,000 in the year, the employee must report the landlord's PAN when claiming the exemption. That is the employee's job at claim time, gathered with the rent receipts, not something you file. It is a common sticking point, so it is worth flagging to staff who rent at the higher end.
And the big exclusion. HRA exemption is not available under the new tax regime, which has been the default for most since AY 2024 to 2025. An employee who stays on the new regime pays tax on HRA the same as any cash pay, however much rent they hand over. Only an employee on the old regime, paying rent, gets any relief here. When you talk to staff about HRA, that regime split is the honest first thing to say.
What is the employer's job with HRA?
Your remit is narrow and clear, which is a relief given how dense the tax side reads. You set HRA as a head in the salary structure, name it on the offer letter, carry it onto the payslip, and deduct correct TDS through the year. That is the structuring and documenting part, and it is the part you own.
What you do not do is compute an employee's tax exemption or decide their taxable income. Whether HRA is exempt, and by how much, is settled under the Income Tax Act when the employee files, using their rent receipts and their choice of regime. Your CA or payroll consultant handles the TDS working and Form 16. The employee claims the exemption. Keeping that line bright protects you; you are not on the hook for a claim the employee makes on their own return.
Practically, that means two habits. Fix a sensible HRA figure when you write the pay structure, and keep the payslip consistent with the offer so the numbers reconcile at year end. If you want the fuller picture of what sits inside a pay packet, the what is CTC guide sets HRA in context alongside Basic, EPF and the rest. For the tax mechanics of the exemption itself, the HRA exemption page goes deeper than this one does. You can also read the official position on the Income Tax Department allowances page.
How Offrd sets up HRA, and where it stops
Straight answer, since HRA is easy to overstate. Offrd does not compute an employee's income tax exemption, does not do IT declarations or investment proofs, and does not tell an employee their taxable income. That work belongs to the employee and their CA. Offrd structures and documents pay.
What Offrd does is build the salary structure with heads like Basic, HRA and other allowances, and carry them onto the offer letter and the payslip. In Offrd, Basic defaults to 50 percent of CTC and HRA defaults to 40 percent of Basic, and both are editable, so you can raise or trim the HRA line to suit your own policy. EPF, ESI, PT and gratuity are computed inside the same structure, on the Basic plus DA base, so the whole packet stays consistent from offer to exit.
More than 4,000 companies across 350 plus Indian cities use Offrd to produce this paperwork in minutes.
Setup takes under two minutes, and the pricing is pay per document from 99 rupees, or 50 rupees per active employee a month, with 50 free credits on signup. Set the HRA head once, keep the same figure flowing through payslips and the full and final settlement, and the arithmetic reconciles at year end without a scramble.
Frequently asked questions
How is the HRA exemption calculated?
Under the old regime the exempt amount is the least of three figures: the actual HRA received, 40 percent of salary or 50 percent if the rented home is in Mumbai, Kolkata, Delhi or Chennai, and rent paid minus 10 percent of salary. Salary here means Basic plus dearness allowance that forms part of retirement benefits.
What counts as salary for HRA?
For the HRA calculation, salary means Basic pay plus dearness allowance that forms part of retirement benefits. Most private SMEs do not run a DA line, so in practice the base is just Basic. It is not the full CTC and it does not include HRA itself or other allowances.
Is HRA available under the new tax regime?
No. The HRA exemption is not available under the new tax regime, which is the default for most since AY 2024 to 2025. An employee on the new regime pays tax on HRA like any other cash pay. The exemption only helps an employee who is on the old regime and pays rent.
When does the employee need the landlord PAN?
If the rent paid exceeds Rs 1,00,000 in the year, the employee must report the landlord's PAN when claiming the HRA exemption. This is the employee's obligation at claim time. As the employer you structure the HRA head and run TDS; the employee gathers rent receipts and the landlord PAN.
Can an employee who owns their home claim HRA?
No. There is no HRA exemption if the employee owns the home they live in, or pays no rent. You can still keep HRA as a salary head on the payslip, but that employee cannot claim the exemption. The exemption depends on rent actually being paid for the home the employee lives in.
Does Offrd calculate an employee's HRA tax exemption?
No. Offrd sets HRA up as a salary head on the offer letter and payslip, defaulting to 40 percent of Basic and editable. Whether that HRA is tax exempt is decided under the Income Tax Act when the employee files, and your CA or payroll consultant handles TDS and Form 16. Offrd structures and documents pay.
Set HRA cleanly, once, and carry it through
Offrd builds HRA into every offer letter, payslip and settlement, defaulting to 40 percent of Basic and fully editable, so your pay documents stay consistent. Setup takes about two minutes.