HRA Exemption Under Schedule III (Old Section 10(13A)): Old vs New Regime Rules

Every July and August, we field the same question from salaried clients in Raipur: "My HRA is ₹15,000 a month, I pay ₹10,000 rent, how much can I claim?" The honest answer is almost always lower than they expect, and it depends on a calculation most people have never actually seen written out — plus, increasingly, on a regime choice that can wipe the whole exemption out regardless of the numbers.

House Rent Allowance exemption used to live at Section 10(13A) of the Income Tax Act, 1961, read with Rule 2A of the Income Tax Rules. Under the Income Tax Act, 2025, effective from 1 April 2026, this provision has been relocated to Schedule III of the new Act. The underlying mechanics — the three-way minimum test, the rent-minus-10%-of-salary formula — carry over unchanged. What moved is the location in the statute, not the substance, and the Rule 2A-style computation table now sits within the Schedule itself rather than as a separate delegated rule.

The Three-Way Minimum

HRA exemption is not simply "whatever your employer pays you as HRA." It's the lowest of three figures:

1. Actual HRA received from the employer during the year
2. Rent paid, minus 10% of salary (salary here means basic pay plus dearness allowance, if the DA terms count for retirement benefits — not gross CTC)
3. 50% of salary if you live in a metro city, or 40% of salary for a non-metro city

Whichever of these three numbers is smallest becomes your exempt HRA. The rest, if any, is added back to taxable salary.

Raipur's classification. For HRA purposes, only a defined set of cities gets the 50% metro rate — historically Delhi, Mumbai, Kolkata, and Chennai, with an expanded eight-city list (adding Bengaluru, Hyderabad, Pune, and Ahmedabad) applying from salary earned in FY 2026-27 onward. Raipur is not on either list. It falls under the non-metro category, which means the 40%-of-salary limb applies to the calculation, not 50%. This is a genuine constraint for Raipur-based salaried employees: at the same salary and rent level, an employee in Raipur will typically have a lower exemption ceiling than an equivalent employee in Mumbai, purely because of the city classification, not because their actual rent burden is any lighter.

A Worked Example for a Raipur Employee

Take a mid-level executive working in Raipur with the following salary structure for the year, filing under the old regime:

• Basic + DA (retirement-benefit-linked): ₹6,00,000 per year
• HRA received: ₹2,40,000 per year (₹20,000/month)
• Actual rent paid: ₹1,80,000 per year (₹15,000/month), for a flat near Shankar Nagar

Now apply the three-way test:

The lowest of the three is ₹1,20,000. That's the exempt HRA. The remaining ₹1,20,000 of the ₹2,40,000 HRA actually received gets added back to taxable salary as fully taxable allowance. Employees are often surprised that half their HRA is taxable even though they're genuinely paying rent — this is exactly why the second test (rent minus 10% of salary) tends to be the binding constraint for people whose rent isn't dramatically higher than their salary base.

If this same employee had been paying a higher rent — say ₹25,000 a month, ₹3,00,000 a year — the calculation shifts: test 2 becomes ₹3,00,000 − ₹60,000 = ₹2,40,000, tying with test 1, and both exceed test 3's ₹2,40,000 ceiling. In that case the exemption caps out at ₹2,40,000, and none of the actual HRA gets added back — the full amount is exempt.

The Point That Changes Everything: New Regime Removes HRA Entirely

This is the single most consequential fact about HRA today, and it has nothing to do with the Act renumbering. Under the new tax regime — governed by what was Section 115BAC under the 1961 Act and continues as the default regime provision under the Income Tax Act, 2025 — HRA exemption is not available at all. Not reduced, not capped differently. Zero.

If you opt for (or default into, since the new regime is now the standard unless you actively elect otherwise) the new tax regime, your entire HRA — the full ₹2,40,000 in our example above — gets added to taxable salary regardless of how much rent you actually pay or which city you live in. The Schedule III exemption exists only for taxpayers who elect the old regime.

This makes the regime choice genuinely load-bearing for anyone with a real rent outgo. Going back to our Raipur example: under the old regime, this employee shields ₹1,20,000 of income from tax through the HRA exemption alone, on top of whatever 80C and 80D deductions they might also claim. Under the new regime, none of that ₹1,20,000 gets sheltered — it's taxed in full, though the employee does get the flat ₹75,000 standard deduction and generally lower slab rates to compensate. Whether the old regime wins out for a given individual depends on the total stack of deductions available to them (HRA plus 80C plus home loan interest plus medical insurance), not on HRA in isolation. We run this comparison for salaried clients every year around March, and for employees paying meaningful rent in Raipur without other large deductions, the old regime frequently still comes out ahead purely because of HRA — it's worth actually running the numbers rather than assuming the new regime's lower rates automatically win.

Documentation That Actually Gets Checked

Rent receipts alone are not enough if your annual rent crosses ₹1,00,000 — you need the landlord's PAN. We've seen assessments get flagged where an employee claimed HRA exemption against a rent agreement with a family member (a common arrangement where an employee "pays rent" to a parent who owns the house) without the landlord actually declaring that rental income in their own return. The Income Tax Department cross-checks this through AIS data, and a mismatch between your claimed rent payment and the landlord's declared rental income is one of the more common triggers for a notice. If you're claiming HRA against rent paid to a relative, make sure the arrangement is genuine and the landlord is reporting the income.

Related Advisory Services & Practice Guides

• Income Tax Advisory & Compliance
• Income Tax Notices & Appeals in Raipur