If you live in Bengaluru, Hyderabad, Pune or Ahmedabad, a tax rule change coming into effect from 1 April 2026 could put ₹15,000 to ₹70,000 more in your pocket over the year, without a single raise.
These cities will now be treated on par with traditional metros like Mumbai and Delhi for House Rent Allowance (HRA) under the old regime. That single classification change raises the maximum HRA exemption from 40% to 50% of salary.
For salaried taxpayers who pay rent, this is one of the most meaningful urban tax changes in recent years. Here’s how it actually works.
What will change in the HRA rules from FY 2026–27?
HRA exemption is calculated as the lowest of these three amounts under the income-tax rules:
- Actual HRA received from your employer.
- 50% of your Basic Salary (for metro cities).
- Rent paid minus 10% of your Basic Salary.
The second condition depends on whether you live in a metro or non-metro city.
Until now:
- Metro cities → HRA exemption capped at 50% of salary
- Non-metro cities → HRA exemption capped at 40% of salary
From April 1, 2026 cities such as Bengaluru, Hyderabad, Pune and Ahmedabad will be treated as metro cities for HRA purposes. This allows salaried employees living in these cities to claim a higher HRA exemption and reduce taxable income.
This is currently part of the income tax draft proposal.
Does this HRA change apply under the new regime?
No, and this is the most important clarification. This HRA change is allowed only under the old regime. If you opt for the new regime, HRA is fully taxable
So even if you live in a newly notified metro city, the benefit is available only if you opt for the old regime.
Why the government updated the metro city list?
The metro classification for tax purposes has remained static for over 30 years, ignoring the massive economic growth of cities like Bengaluru, Hyderabad, Pune, and Ahmedabad.
Over the past decade:
- Rental costs in these cities have risen to metro levels
- High-income salaried employment has shifted beyond the traditional four metros
- Large urban workforces were still taxed as ‘non-metro’ residents
The revised HRA reflects how India’s workforce and housing markets have actually evolved.
Who benefits from the new HRA rules?
You benefit from this change only if all of the following apply:
- You are a salaried employee
- HRA is part of your salary structure
- You pay rent
- You opt for the old regime
You will not benefit if:
- You file ITR under the new regime
- You live in a self-owned house
- Your employer does not provide HRA
- Your rent is very low relative to your salary
So, this is not a blanket benefit, it applies to a specific slice of salaried taxpayers.
How much extra HRA exemption can you claim?
The shift from 40% to 50% increases the upper limit of HRA exemption by 10% of salary.
However, your actual exemption depends on:
- Basic salary
- HRA received
- Rent paid
- City of residence
Don’t worry, you don’t have to grab a paper and pen to calculate it. We have a tool that will do the math for you!
How it will impact your taxes?
Consider a Bengaluru-based employee with an annual CTC of ₹20 Lakh and a basic salary of 50% (₹10 Lakh), paying market-rate rent and sit in the 30% tax slab.
- With the 40% Limit: Their maximum exemption was roughly ₹4 Lakh.
- With the 50% Limit: Their maximum exemption expands to ₹5 Lakh.
That additional ₹1 Lakh exemption directly reduces taxable income, potentially saving ₹30,000+ in taxes. Even for those in lower tax brackets, the additional exemption translates into meaningful annual savings. But you should also consider your salary structure.
A higher limit does not just mean higher exemption. Many employees miss out because:
- HRA component in salary is too low
- Salary structure hasn’t been revised in years
- Employer payroll still assumes older limits
If HRA itself is capped at a small percentage of basic salary, the new 50% ceiling won’t create a significant benefit.
From April 2026 onward, reviewing and restructuring salary components may become necessary.
Does this make the old regime more attractive again?
For some taxpayers, yes.
The new regime gained traction due to simplicity and lower headline tax rates. But a higher HRA exemption changes the equation for urban renters, mid-to-senior salaried professionals and households with significant rental outgo.
This does not mean the old regime is universally better. It does mean the choice should be re-evaluated, not assumed.
What proofs are required to claim higher HRA exemption?
To claim the exemption, you should have these ready:
- Rent agreement: Signed by both tenant and landlord with rent amount clearly stated
- Monthly rent receipts: Collect receipts for every month. Mandatory; bank statements help if payments are digital
- Landlord’s PAN: Required if annual rent exceeds ₹1,00,000
- Form 60 declaration: If landlord does not have PAN
- TDS proof under Section 194-IB: Applicable if monthly rent exceeds ₹50,000
Since this change is only for the old regime, your employer will ask for your “Regime Declaration” at the start of the financial year. To see the benefit in your monthly take-home pay immediately, you must:
- Formally opt for the old regime.
- Submit your rent agreement and landlord PAN details to your payroll portal early.
FAQs
1. If my employer calculates HRA using 40%, can I still claim 50%?
Yes, while filing your income-tax return, if eligible.
2. What if I move cities during the year?
HRA exemption is calculated month-wise based on residence.
3. Does this apply to self-employed individuals?
No. HRA applies only to salaried employees.