Bengaluru, Hyderabad, and 6 Other Cities to Receive 50% HRA Exemption Under Draft IT Rules 2026

The draft Income Tax Rules, 2026, propose a significant change in House Rent Allowance (HRA) exemptions for salaried taxpayers who choose the old tax regime. Currently, only four cities—Delhi, Mumbai, Kolkata, and Chennai—are classified as metros, allowing employees to claim up to 50% of their Basic salary plus Dearness Allowance (DA) as HRA exemption. For other cities, this exemption is limited to 40%.

This proposal, put forward in Rule 279 of the Schedule III, responds to long-standing demands in high-rent cities like Bengaluru. It aims to offer more equitable treatment to professionals facing high housing costs in expanding urban centers. Bengaluru South MP Tejasvi Surya, who has been advocating for this change since 2022, celebrated it as a significant win.

Present-day HRA Exemption Structure

The calculation of HRA exemption is based on the minimum of three figures: the actual HRA received, the rent paid less 10% of the salary, and 50% or 40% of the salary depending on the city's classification. Metro city residents can claim up to 50% of their (basic salary + DA), while non-metro residents are limited to 40%.

This structure encourages employers to offer higher HRA in more expensive locations. However, the technical definition of a metro has been a disadvantage for employees in cities like Bengaluru, where average rent is comparable to Mumbai but the exemption is capped at a lower level.

To claim the exemption during the filing of Income Tax Returns (ITR), employees must attach rent receipts and the landlord's PAN (if the rent exceeds Rs 1 lakh annually). The exemption is only available under the old tax regime; the new regime does not provide HRA deduction.

Key Changes in Draft Rules

The draft rules also reclassify metro cities, including Bengaluru, Hyderabad, Pune, and Ahmedabad in the list. The updated list of cities eligible for 50% HRA exemption is:

- Mumbai - Delhi - Kolkata - Chennai - Hyderabad - Pune - Ahmedabad - Bengaluru

All other cities will retain the 40% cap.

This expansion aligns HRA limits with the economic realities in Tier-1 cities. For example, tech employees in Bengaluru, who often spend more than 30-40% of their income on rent, will save thousands of dollars annually in taxes.

The regulations also introduce higher transport allowances for differently-abled employees: Rs 15,000 + DA in metros (Rs 8,000 + DA elsewhere) for the blind, deaf, mute, or orthopedically challenged personnel.

Updated 50% HRA Exemption List

| City | Previous Status | New Status (Draft 2026) | |-------------|-----------------|-------------------------| | Mumbai | 50% | Metro (50%) | | Delhi | 50% | Metro (50%) | | Kolkata | 50% | Metro (50%) | | Chennai | 50% | Metro (50%) | | Bengaluru | 40% | Metro (50%) | | Hyderabad | 40% | Metro (50%) | | Pune | 40% | Metro (50%) | | Ahmedabad | 40% | Metro (50%) |

All other cities will retain the 40% cap.

Implications for Taxpayers

The inclusion of these cities will allow salaried individuals to claim 10% more exemption on their HRA component. For someone earning a basic salary of Rs 1 lakh per month, this represents an additional labor allowance of Rs 10,000-1.2 lakh per month (or Rs 12,000-36,000 annually), depending on the tax slab.

This is particularly beneficial for IT hubs like Bengaluru and Hyderabad, where millions of residents are renters. However, the changes are subject to public opinion and official gazette notification. Employers can adjust salary structures accordingly, but claims must be supported by evidence of residence in the listed cities.

Stakeholder Reactions

MP Tejasvi Surya welcomed the inclusion, stating it will provide Bengaluru residents with benefits equal to those in Mumbai, Delhi, Kolkata, and Chennai. He also praised the disability provisions for promoting inclusivity.

Media outlets like the Times of India and Deccan Herald hailed the move as a significant tax cut for thousands of employees. The pressure on rental costs in these cities has increased since the Union Budget.

Conclusion

The proposed expansion of 50% HRA exemption to eight major cities is a pro-taxpayer reform that will help reduce the tax burden as the cost of living rises. While awaiting the official gazette notification, employees should review their salary slips and prepare the necessary documents. This reform strengthens the attractiveness of the old tax regime, potentially influencing tax decisions in FY 2026-27.