The Three-Way Calculation Most People Get Wrong
HRA exemption is the LEAST of: (1) Actual HRA component in your salary, (2) Rent paid minus 10% of basic salary, (3) 50% of basic for metros (40% for non-metros). Whichever is smallest is your exemption. Most people only know about one of these formulas and assume that is their exemption. Run all three. Often the limiting factor is "rent paid minus 10% of basic" — meaning you can pay higher rent or have higher basic salary to maximize exemption.
Paying Rent to Family: Legal but Tricky
You can pay rent to your parents and claim HRA exemption. But it must be legitimate: actual money transfer (bank/UPI, never cash), proper rent agreement, monthly rent receipts, and your parents must declare it as rental income in their ITR. If parents are in lower tax bracket (e.g., retired, no other income), the family saves significant tax. Example: ₹3L annual rent. You save ₹93,000 tax (30% bracket). Parents pay ₹0-30,000 tax (5% slab). Net family savings: ₹63,000-93,000 annually.
Required Documentation
For HRA above ₹3,000 monthly, you need: Rent agreement (executed properly), Monthly rent receipts (revenue stamp if rent over ₹5,000), Landlord PAN if annual rent exceeds ₹1 lakh (CRUCIAL — without this, exemption gets denied), Bank statements showing rent payment. For salaried employees, submit these to HR/payroll by January 31st. If you miss this deadline, claim it during ITR filing — the documentation requirement is the same.
HRA in New Tax Regime: The Catch
HRA exemption is not available in the new tax regime. This is the most important factor in the old vs new regime decision. If your annual HRA exemption is ₹2-4 lakhs (typical for metro residents), you are giving that up by choosing new regime. For most metro tenants with substantial HRA, old regime wins by ₹50,000-1.5 lakhs in tax savings. Only consider new regime if you do not have HRA (own home, living with parents without paying rent, etc.).