HRA Exemption Calculation — The Actual Formula
HRA exemption under the old tax regime is the LEAST of three amounts — actual HRA received, rent paid minus 10% of basic, or 50%/40% of basic for metro/non-metro cities — a different calculation from the Labour Codes' 50% cap on excluded allowances.
The four Labour Codes came into force on 21 November 2025. Central rules are still being finalised and state rules vary — some states have notified final rules, others remain in draft. Verify the position for your state before relying on these figures.
Not fixed at 50% — set any figure and see the compliance effect.
Excluded allowances are 59% of total remuneration — ₹9,025/month above the 50% cap.
That amount is added back into wages, taking statutory wages to ₹49,025/month. Gratuity accrual rises by ₹5,209/year. PF itself doesn't move here because wages already exceed the ₹15,000 ceiling on this PF option — only gratuity, which has no such ceiling, is affected.
Additional annual employer cost of compliance: ₹5,209 per employee.
CTC is unchanged. Take-home falls only if employee PF rises (it may not, if wages were already above the ceiling) — but gratuity accrual, the employee's retirement benefit, always rises when there's an add-back.
Salary structure
| Component | Monthly | Annual | % CTC |
|---|---|---|---|
| Basic + DA | ₹40,000 | ₹4,80,000 | 40.0% |
| HRA | ₹20,000 | ₹2,40,000 | 20.0% |
| Other allowances | ₹38,050 | ₹4,56,600 | 38.0% |
| Statutory wages (post add-back) | ₹49,025 | ₹5,88,300 | 49.0% |
| Gross salary | ₹98,050 | ₹11,76,600 | 98.0% |
| PF — employee (12%) | ₹1,800 | ₹21,600 | 1.8% |
| PF — employer (12%) | ₹1,800 | ₹21,600 | 1.8% |
| Professional Tax | ₹200 | ₹2,400 | 0.2% |
| Gratuity accrual (4.81%) | ₹2,358 | ₹28,297 | 2.4% |
| Net take-home | ₹96,050 | ₹11,52,600 | 96.0% |
Estimated TDS (new regime): ₹0/month · (old regime): ₹13,042/month — full comparison →
The Codes require full and final settlement within a very short window after an employee's last working day — commonly cited as two working days, though some sources say 48 hours. Confirm the exact statutory wording with a CA/CS before committing to a date in writing.
The three-way 'least of' formula
HRA exemption (Section 10(13A), old tax regime only) is the LEAST of: (1) actual HRA received from the employer, (2) rent actually paid minus 10% of basic salary, and (3) 50% of basic salary for a metro city (Delhi, Mumbai, Kolkata, Chennai) or 40% for any other city. Whichever of these three is smallest is the exempt amount — the rest of the HRA received, if any, is taxable.
This means structuring HRA at exactly 50%/40% of basic does NOT guarantee the full amount is tax-free — an employee paying less rent than their HRA allowance will have their exemption capped by the rent-paid condition, not the percentage-of-basic condition. Employees renting well below their HRA allowance, or living in a home they own, get little or no HRA exemption regardless of how the salary slip is structured.
Why this is a DIFFERENT 50% from the Labour Codes rule
It's easy to conflate HRA's '50% of basic for metro cities' figure with the Code on Wages' '50% of total remuneration' cap on excluded allowances — they're unrelated computations answering different questions. HRA's 50%/40% only determines a tax EXEMPTION ceiling for one specific allowance; the Labour Codes' 50% determines whether an add-back is needed for PF/gratuity/ESI/bonus across ALL excluded allowances combined. A salary structure can pass one test and fail the other.
HRA under the new tax regime
HRA exemption is NOT available under the new (default) income tax regime at all — the exemption applies only if the employee opts for the old regime. An employee under the new regime receives HRA as fully taxable income regardless of rent paid or the metro/non-metro percentage.
Frequently asked questions
Related pages
Why this matters
Getting the wage base wrong for one client is a correction; getting it wrong across a payroll book is a liability — PracticeFlow keeps every client's compliance status visible in one place.
Related tools
Restructuring payroll for the Labour Codes across 60 clients? PracticeFlow tracks every client's compliance status, assigns the review work, and keeps a firm-wide audit trail — so nothing gets missed.
See PracticeFlow for CA FirmsEstimate for planning purposes, not legal or tax advice — always confirm with a CA before restructuring a client's payroll.