HRA Exemption Rules April 2026: 50% Benefit for 8 Cities Now

Imagine paying ₹25,000 monthly rent in Bengaluru but getting the same HRA tax benefit as someone in a smaller city—frustrating, right? Not anymore. From April 1, 2026, the government has rewritten the rules. If you're a salaried employee in Bengaluru, Hyderabad, Pune, or Ahmedabad, your House Rent Allowance (HRA) exemption just got a major upgrade under the newly notified Income-tax Rules 2026.

This comprehensive guide explains the expanded HRA exemption rules, who benefits, how calculations work, mandatory compliance changes, and strategic tax planning tips for FY 2026-27.

What Changed in HRA Exemption Rules from April 2026?

The Central Board of Direct Taxes (CBDT) notified the Income-tax Rules 2026 on March 20, 2026, which came into force on April 1, 2026. Under Rule 279 of the draft rules, the definition of "metro city" for HRA calculation now includes Bengaluru, Hyderabad, Pune and Ahmedabad, doubling the number of cities eligible for higher exemption from four to eight.

The proposed HRA claim rule reforms take effect beginning April 1, 2026, as the government is both increasing compliance and at the same time, providing targeted relief to those employees in the high-rent cities. This change acknowledges the reality that cities like Bengaluru and Hyderabad have evolved into major employment hubs with rental costs matching or exceeding traditional metros.

The Old vs. New Metro City Classification

Previously, only four cities enjoyed the 50% HRA benefit: Mumbai, Delhi, Chennai, and Kolkata. Salaried taxpayers from metro cities were allowed to claim HRA exemption up to 50% of salary, whereas those from non-metro cities can claim up to 40%. However, now the list of metro cities has been expanded by adding Bengaluru, Hyderabad, Pune and Ahmedabad.

This reclassification reflects India's changing urban landscape. Cities such as Hyderabad, Pune, Ahmedabad and Bengaluru will also be brought under the 50% category, reflecting their growth as major employment hubs and the sharp rise in rental costs.

Understanding Section 10(13A) and Rule 279 of Income-tax Rules 2026

House Rent Allowance exemption is governed by Section 10(13A) of the Income Tax Act read with Rule 2A (now Rule 279 in the Income-tax Rules 2026). Under Section 10(13A) of the Income Tax Act, a portion of HRA can be claimed as an exemption, effectively reducing the taxable income.

Eligibility Criteria for HRA Exemption

To claim HRA exemption under the new rules, you must satisfy these conditions:

• You must be a salaried employee receiving HRA as part of your salary structure
• You must live in rented accommodation and actually pay rent
• HRA must be a component of your CTC (Cost to Company)
• You must file taxes under the old tax regime (not the new regime under Section 115BAC)
• You must maintain proper rent receipts and documentation

Critical Note: The HRA exemption is only available under the Old Tax Regime. Taxpayers opting for the New Tax Regime cannot claim an HRA exemption, making it fully taxable.

How to Calculate HRA Exemption Under Income-tax Rules 2026

The HRA exemption calculation formula remains unchanged. Employees residing in these cities can claim an exemption of up to 50% of their salary, calculated as the least of the actual HRA received, rent paid exceeding 10% of salary, or the prescribed percentage based on city classification.

The Three-Step Formula

Your HRA exemption is the lowest of these three amounts:

1. Actual HRA received from your employer during the year
2. Rent paid minus 10% of salary (Salary = Basic + DA + Commission as % of turnover)
3. 50% of salary for the eight metro cities OR 40% of salary for all other cities

Practical Calculation Example: Bengaluru Employee

Let's calculate HRA exemption for Mr. Sharma working in Bengaluru for FY 2026-27:

• Basic Salary: ₹40,000/month (₹4,80,000/year)
• HRA Received: ₹15,000/month (₹1,80,000/year)
• Rent Paid: ₹20,000/month (₹2,40,000/year)
• City: Bengaluru (now classified as metro)

Step 1: Actual HRA received = ₹1,80,000
Step 2: Rent paid minus 10% of salary = ₹2,40,000 - (₹4,80,000 × 10%) = ₹2,40,000 - ₹48,000 = ₹1,92,000
Step 3: 50% of salary (metro rate) = ₹4,80,000 × 50% = ₹2,40,000

HRA Exemption = Lowest of the three = ₹1,80,000

In this case, the entire HRA received (₹1,80,000) is exempt from tax. Before April 2026, Mr. Sharma would have been capped at 40% (₹1,92,000), but since the actual HRA was the limiting factor, his exemption remains the same. However, for employees with higher HRA components, this change creates significant tax savings.

Use the HRA Calculator to compute your exact exemption amount instantly.

Comparison: Old 4-Metro vs. New 8-Metro Classification

Under the new rules, eight cities such as Mumbai, Kolkata, Delhi, Chennai, Hyderabad, Pune, Ahmedabad, and Bengaluru will qualify for a higher exemption limit of 50 percent of salary, while all other locations will continue at 40 per cent.

New Compliance Requirements: Mandatory Landlord Relationship Disclosure

The Income-tax Rules 2026 introduce stricter compliance measures to prevent fake HRA claims and increase transparency.

Key Documentation Changes

Taxpayers claiming HRA exemption must now disclose their relationship with the landlord. This information is to be furnished in the newly introduced Form 124. This replaces the earlier Form 12BB.

Landlord's full name, PAN card, complete address of the rented property and declaration of the relationship with landlord has become mandatory. Stricter verification on written rental agreements, digital transactions, and rent receipts are few changes coming with the New Draft Rules, 2026.

When is Landlord PAN Mandatory?

If your annual rent exceeds ₹1,00,000 (approximately ₹8,333 per month), you must provide:

• Landlord's PAN number
• Landlord's full name and complete address
• Your relationship with the landlord (if any)
• Valid rent agreement
• Proof of digital payment transactions

This measure targets arrangements where employees claimed HRA by paying rent to family members without proper disclosure, a common tax evasion practice.

Who Benefits Most from the New HRA Rules?

This will benefit more mid and high-income salaried employees living and working from these metro cities to save more on tax. The expanded metro list particularly helps:

• IT professionals in Bengaluru: India's Silicon Valley has some of the highest rental rates
• Pharma and manufacturing employees in Hyderabad and Pune: Major industrial hubs with growing workforce
• Corporate employees in Ahmedabad: Emerging business center with rising accommodation costs
• Employees under old tax regime: Those who maximize deductions like 80C, 80D, and HRA

Important: This benefit is NOT available to employees in satellite cities like Noida, Gurugram, Faridabad, Navi Mumbai, or Thane, which continue to fall under the 40% non-metro category despite high rental costs.

Old Tax Regime vs. New Tax Regime: Which to Choose?

The HRA exemption debate directly impacts your regime choice. The HRA benefit is not available in the new tax regime. Here's a strategic comparison:

Choose Old Tax Regime If:

• You pay significant rent and receive substantial HRA
• You invest in Section 80C instruments (PPF, ELSS, life insurance) up to ₹1.5 lakh
• You have home loan interest (Section 24b) or health insurance premiums (Section 80D)
• Your total deductions exceed ₹2.5-₹3 lakh annually

Choose New Tax Regime If:

• You don't pay rent or don't receive HRA
• You prefer lower tax rates without claiming deductions
• Your income is below ₹12 lakh (eligible for full rebate under Section 87A)
• You want simplified tax filing with minimal documentation

Calculate your optimal regime using the Income Tax Calculator that compares both regimes side-by-side with your actual salary and deductions.

Real Tax Savings Example: Before vs. After April 2026

Let's see the actual tax impact for a Hyderabad employee:

Profile: Ms. Priya, Software Engineer in Hyderabad
Annual Basic Salary: ₹10,00,000
Annual HRA Received: ₹5,00,000
Annual Rent Paid: ₹3,60,000 (₹30,000/month)
Tax Regime: Old

Before April 2026 (40% cap for non-metro):

• Actual HRA: ₹5,00,000
• Rent - 10% of salary: ₹3,60,000 - ₹1,00,000 = ₹2,60,000
• 40% of salary: ₹4,00,000
• HRA Exemption = ₹2,60,000
• Taxable HRA = ₹5,00,000 - ₹2,60,000 = ₹2,40,000

After April 2026 (50% cap for metro):

• Actual HRA: ₹5,00,000
• Rent - 10% of salary: ₹2,60,000 (same)
• 50% of salary: ₹5,00,000
• HRA Exemption = ₹2,60,000

In this specific case, the exemption remains ₹2,60,000 because "rent minus 10% of salary" is still the limiting factor. However, if Ms. Priya's HRA component were higher or structured differently, the increased 50% cap would create additional tax savings.

The real benefit emerges for employees whose HRA exemption was previously capped at 40% of salary—they can now claim up to 50%, potentially saving ₹15,000-₹50,000 in annual taxes depending on income slab.

Step-by-Step Guide to Claim HRA Exemption for FY 2026-27

Step 1: Verify Your City Classification
Check if you work in one of the eight metro cities. Your workplace location matters, not residence location.

Step 2: Gather Required Documents

• Rent receipts for all 12 months (signed by landlord)
• Rent agreement copy
• Landlord's PAN (if rent exceeds ₹1 lakh annually)
• Proof of rent payment (bank statements, UPI transactions)
• Landlord relationship declaration (Form 124)

Step 3: Submit to Employer
Provide documents to your HR department before they process Form 16. This ensures correct TDS calculation and reduces your monthly tax deduction.

Step 4: Calculate Exemption
Use the three-step formula or the HRA Calculator to determine your exempt amount.

Step 5: File ITR Correctly
While filing your Income Tax Return, report the exempt HRA in the "Allowances exempt under Section 10" section. The taxable portion gets added to your salary income.

Cross-verify your TDS credits using the Form 26AS / TDS Fetch Tool before filing to avoid discrepancies.

Common Mistakes to Avoid When Claiming HRA

• Claiming HRA under new tax regime: Remember, HRA exemption is available only under the old regime
• Fake rent receipts: The Income Tax Department uses AI to detect suspicious claims. Always maintain genuine documentation
• Paying rent to spouse: While paying rent to parents is allowed (if they own the property and declare rental income), paying rent to your spouse living with you is not permitted
• Missing PAN disclosure: Failure to provide landlord PAN when rent exceeds ₹1 lakh can lead to full HRA becoming taxable
• Not updating HR mid-year: If you change residence or rent amount during the year, inform HR immediately for accurate TDS calculation

Impact on Other Allowances: Children's Education & Hostel Allowance

The Income-tax Rules 2026 also enhanced other allowances for salaried employees under the old regime:

The new rules have increased the children's education allowance from ₹ 100 to ₹3,000 per month per child (for a maximum of two children). Similarly, the hostel expenditure allowance has also been increased from ₹300 to ₹ 9,000 per month per child.

These changes, combined with expanded HRA benefits, make the old tax regime more attractive for dual-income families with children in hostels and high rental expenses.

Future of HRA: What to Expect Beyond 2026

The expansion from 4 to 8 metro cities signals the government's responsiveness to India's evolving urban economy. Industry experts suggest:

• Further expansion possible for cities like Jaipur, Chandigarh, Kochi, and Indore in future years
• Potential digitization of HRA claims through integration with rental payment platforms
• Stricter enforcement using AI and data analytics to catch fraudulent claims
• Possible rationalization as government pushes new tax regime adoption

For now, salaried employees should maximize available benefits while they remain robust under the old regime. Strategic tax planning for FY 2026-27 should factor in the expanded HRA benefits when deciding between regimes.

Frequently Asked Questions (FAQs)

Which cities are eligible for 50% HRA exemption from April 2026?

Under the Income-tax Rules 2026 notified on March 20, 2026, eight cities qualify for 50% HRA exemption: Mumbai, Delhi, Chennai, Kolkata (the original four metros), plus the newly added Bengaluru, Hyderabad, Pune, and Ahmedabad. This expansion is outlined in Rule 279 of the Income-tax Rules 2026 and applies to employees working under the old tax regime from FY 2026-27 onwards. The classification is based on workplace location, not residential address.

How is HRA exemption calculated under Section 10(13A) for the new metro cities?

HRA exemption is calculated as the lowest of three amounts: (1) Actual HRA received from employer, (2) Rent paid minus 10% of salary (Basic + DA), or (3) 50% of salary for the eight metro cities or 40% for non-metro cities. For example, if you work in Bengaluru with a basic salary of ₹40,000/month, pay ₹20,000 rent, and receive ₹15,000 HRA monthly, your annual exemption would be calculated by comparing these three amounts and taking the minimum. The 'salary' for calculation purposes includes basic salary, dearness allowance, and commission as percentage of turnover.

Can I claim HRA exemption under the new tax regime in FY 2026-27?

No, HRA exemption under Section 10(13A) is available only under the old tax regime. If you opt for the new tax regime under Section 115BAC, you cannot claim HRA exemption, and the entire HRA component becomes fully taxable. This remains unchanged in the Income-tax Rules 2026. Salaried employees must choose between the old regime with deductions like HRA, 80C, 80D or the new regime with lower slab rates but no deductions. Use a tax calculator to compare which regime saves you more tax based on your actual salary structure and expenses.

What new documentation is required for HRA claims from April 2026?

The Income-tax Rules 2026 make it mandatory to disclose the relationship between landlord and tenant when claiming HRA exemption. This information must be furnished in the newly introduced Form 124 (replacing Form 12BB). Additionally, if annual rent exceeds ₹1,00,000, you must provide the landlord's PAN, full name, complete address of the rented property, and stricter verification of rental agreements and digital payment records is now required. Maintain rent receipts signed by landlord, valid rent agreement, and proof of digital transactions like bank transfers or UPI payments.

Will employees in Noida and Gurugram get 50% HRA exemption benefits?

No, cities like Noida, Gurugram, Ghaziabad, and other satellite cities remain classified as non-metro cities under the Income-tax Rules 2026. Employees working in these locations can claim only 40% of their salary as HRA exemption, not 50%. The expanded metro list is specifically limited to the eight cities: Mumbai, Delhi, Chennai, Kolkata, Bengaluru, Hyderabad, Pune, and Ahmedabad as per Rule 279. Despite high rental costs in NCR satellite cities, the government has not included them in the metro classification for HRA purposes.

Conclusion: Maximize Your HRA Benefits from April 2026

The expansion of 50% HRA exemption to Bengaluru, Hyderabad, Pune, and Ahmedabad under the Income-tax Rules 2026 is a significant relief for salaried employees in these high-rent cities. From April 1, 2026, over 8 million additional employees can potentially benefit from higher tax exemptions on their house rent allowance.

However, remember that this benefit is available only under the old tax regime. Strategic planning is essential—calculate whether the old regime with HRA, 80C, and other deductions saves you more tax compared to the new regime's lower slab rates. With stricter compliance requirements including landlord relationship disclosure and mandatory documentation, maintain impeccable records to avoid scrutiny.

Plan your FY 2026-27 taxes smartly using TaxFetch Tools—calculate HRA exemption, compare tax regimes, verify Form 26AS, and file ITR accurately. Start saving tax today!