Paying rent does not always lead to the same tax treatment.
The outcome depends on how your accommodation is structured: whether you receive House Rent Allowance (HRA), your employer provides the accommodation, or you pay rent yourself without receiving HRA.
To see the difference, consider Saritha in three different situations.
Situation 1 — Her Employer Gives HRA as Part of Salary
Saritha has moved to Bengaluru for a new job.
Her salary structure is:
- Basic + DA — ₹25,000/month
- HRA — ₹25,000/month
- Total CTC — ₹50,000/month
She rents a flat and pays ₹15,000 every month to her landlord.
Since HRA is part of her salary, the source explains that she can claim an exemption under the Income Tax Act, 2025.
The exempt amount is the least of these three:
-
Actual HRA received
₹25,000 × 12 = ₹3,00,000 -
Rent paid minus 10% of salary
₹1,80,000 − ₹30,000 = ₹1,50,000 -
50% of salary
50% × ₹3,00,000 = ₹1,50,000
The least amount is ₹1,50,000.
Accordingly, in this illustration:
HRA exempt: ₹1,50,000
Remaining HRA added to taxable income: ₹1,50,000
For this calculation, the source defines salary for HRA purposes as Basic + DA + commission as a fixed percentage of turnover, with special allowances excluded.
The source notes that this benefit is available under the old tax regime only.
Situation 2 — Her Employer Provides Accommodation Instead
Now imagine Saritha does not receive HRA.
Her CTC consists of:
- Basic + DA — ₹25,000/month
- Special allowance — ₹25,000/month
Instead, her employer provides a company-owned flat in Bengaluru and recovers only ₹2,000 from her salary every month.
She may be paying towards the accommodation, but the employer-provided benefit can still constitute a taxable perquisite.
The source calculates it as:
Taxable perquisite = 10% of salary − rent paid by Saritha
Using the example:
10% of ₹6,00,000 − (₹2,000 × 12)
= ₹60,000 − ₹24,000
= ₹36,000
So ₹36,000 is added to her taxable income in this illustration.
The source also notes that if her employer recovered nothing, the full ₹60,000 would be taxable.
For this perquisite calculation, the source states that salary includes basic pay, DA where counted for retirement benefits, taxable allowances and bonus, while excluding PF contributions, exempt allowances, the perquisites themselves and retirement lump sums.
Unlike HRA, the source notes that accommodation-perquisite valuation applies under both old and new tax regimes.
Situation 3 — Saritha Leaves Her Job and Starts Consulting
Now Saritha is self-employed.
She receives:
- no salary;
- no HRA; and
- no employer-provided accommodation.
But she still rents an apartment for ₹10,000 per month.
The guide identifies Section 134 of the Income Tax Act, 2025 as providing a deduction for eligible individuals who pay rent but do not receive HRA.
Assume Saritha’s annual consulting income is ₹6,00,000.
The deduction is illustrated as the least of:
-
Rent paid minus 10% of total income
₹1,20,000 − ₹60,000 = ₹60,000 -
25% of total income
25% × ₹6,00,000 = ₹1,50,000 -
₹5,000 per month
= ₹60,000/year
The least is ₹60,000.
So the deduction in this illustration is ₹60,000.
The source also highlights two conditions:
- Saritha, her spouse or minor child should not own a residential property in Bengaluru; and
- she needs to file the prescribed declaration in Form No. 31.
The source notes that this deduction is available under the old tax regime only.
Three Situations at a Glance
| Situation | Tax treatment in the source | Regime |
|---|---|---|
| Receives HRA and pays rent | HRA exemption — Schedule III, Sl. 11 | Old regime only |
| Receives company accommodation | Perquisite — Section 17(1)(a) | Both regimes |
| Receives no HRA and pays rent herself | Section 134 deduction | Old regime only |
The Takeaway
It is not simply about how much rent you pay.
The tax treatment can change depending on how your compensation and accommodation are structured and which provision applies to your situation.
Same city. Same person. Three different tax outcomes.
The original visual guide is also available with this resource for readers who prefer the four-page quick-reference version.
This resource is intended for general informational and educational purposes. The examples are simplified illustrations based on the source material and should not be treated as personalised tax or legal advice. Tax treatment can depend on the applicable law, tax regime and individual circumstances. Please consult a qualified tax professional for advice relating to a specific situation.