HRA exemption if my city is not in metro or Tier-2 approved list?

Question

Hi everyone, I'm Suresh Babu, working in Coimbatore, Tamil Nadu. Drawing around ₹62,000 in hand per month, basic is roughly ₹28,000. Company does give HRA component — around ₹8,000/month. I'm paying ₹12,000 rent for a decent 2BHK here.

Now the issue is — Coimbatore is not in the metros list (Mumbai, Delhi, Chennai, Kolkata) and I'm not sure if it falls under the 40% or 50% HRA exemption bucket. My CA last year just used 40% without explaining anything. But someone in my office said Coimbatore might qualify for higher exemption somehow.

Also I pay rent to my father — is that allowed or will IT department flag it? We do have a proper rent agreement and he shows it in his income.

Filing ITR-1 this year myself for the first time. Little scared honestly. Anyone from non-metro cities dealt with this? What's the actual rule here?

Answer 1

Honestly, your CA did the right thing using 40%. Let me explain why.

The HRA exemption rule under Section 10(13A) has only two slabs — 50% of basic salary for Mumbai, Delhi, Chennai, and Kolkata. Every other city in India, including Coimbatore, Pune, Hyderabad, Bengaluru — yes even Bengaluru — gets 40%. Doesn't matter how big or expensive the city is. This rule hasn't been updated in decades and it's frankly outdated, but that's what the law says right now.

So for you the exemption is calculated as the minimum of these three:
- Actual HRA received: ₹8,000/month = ₹96,000/year
- Rent paid minus 10% of basic: ₹12,000 - ₹2,800 = ₹9,200/month = ₹1,10,400/year
- 40% of basic salary: 40% of ₹28,000 = ₹11,200/month = ₹1,34,400/year

The minimum is ₹96,000 — so your full HRA of ₹96,000 is exempt. You're actually in a good position because your rent paid easily covers it.

Now about paying rent to your father — this is completely legal and thousands of people do it. IT department won't flag it automatically. What matters is that the rent agreement is proper, you're actually transferring money (keep bank transfer records, don't pay cash), and your father is declaring it as income in his ITR. If all three are in order, you're fine. In fact the Supreme Court has upheld this in multiple cases.

One thing most people get wrong — they forget that if annual rent exceeds ₹1 lakh, you must submit your landlord's PAN to your employer. Since you're paying ₹1,44,000 per year to your father, get his PAN submitted. If you've already left that employer or they didn't collect it, you still need to mention it when filing ITR.

For ITR-1 filing, use the income tax e-filing portal directly. It's actually straightforward now. Have Form 16 from employer ready, your rent receipts, and the rent agreement.

My recommendation — go ahead and claim the full ₹96,000 HRA exemption, submit father's PAN, keep all bank transfer records safely, and file confidently. You're not doing anything wrong here.

Answer 2

I'll slightly push back on one thing Ramesh said — while the 40% rule is correct legally, don't just stop there and assume you're getting maximum benefit.

Your actual HRA component from employer is ₹8,000/month. But you're paying ₹12,000 rent. That gap is the real problem nobody talks about. The exemption is capped at the HRA you actually receive — so you can only claim ₹96,000 exempt no matter what. The extra ₹4,000 rent you're paying above HRA gives you zero additional tax benefit under HRA.

What you should actually do is talk to your HR about restructuring your salary. Many companies in Coimbatore, especially IT and manufacturing firms, allow flexible benefit plans where you can increase your HRA component and reduce special allowance. Special allowance is fully taxable. HRA has exemption. Simple swap, same CTC, lower tax. This is legal and very common.

If you're under new tax regime — and this is important — HRA exemption doesn't apply at all. Zero. So first confirm which regime your employer is using for TDS deduction. If it's new regime, this whole HRA conversation is irrelevant for you and you should think differently about tax saving.

Also on the father-as-landlord thing — it works, but be aware that if your father is in a higher tax slab than you, the family's overall tax outgo actually increases. Worth calculating both ways before assuming it's beneficial.

My take: before worrying about 40% vs 50%, check your tax regime first, then look at salary restructuring through HR. Those two moves will save you more than any exemption calculation.