The Income-tax Rules, 2026 — the machinery notified to operationalise the Income-tax Act, 2025 from 1 April 2026 — doubled the number of cities that qualify for the higher House Rent Allowance exemption. Bengaluru, Hyderabad, Pune and Ahmedabad join Delhi, Mumbai, Kolkata and Chennai. Eight metros where there were four.
The short version: HRA exemption is the lowest of three numbers, and the city rate is only one of them. If your exemption was already capped by "rent paid minus 10% of basic", moving from 40% to 50% gives you exactly nothing. It helps only when the percentage-of-basic figure was the smallest of the three — which typically means high rent relative to a modest basic salary. And none of it applies unless you're on the old tax regime.
The rule that decides everything
Under Section 10(13A), your exempt HRA is the lowest of these three:
- The actual HRA your employer paid you
- Rent paid minus 10% of basic salary plus dearness allowance
- 50% of basic + DA in a metro city, or 40% everywhere else
Only the third item changed. That matters more than it sounds, because in a lowest-of-three test, raising one input has no effect unless that input was the one doing the limiting. This is where most coverage of the change goes wrong — it reports a bigger percentage and implies a bigger refund, without checking whether the percentage was ever the constraint.
The eight cities
| Rate | Cities | Status |
|---|---|---|
| 50% | Delhi, Mumbai, Kolkata, Chennai | Unchanged |
| 50% | Bengaluru, Hyderabad, Pune, Ahmedabad | New from FY 2026-27 |
| 40% | All other cities — Gurgaon, Noida, Jaipur, Surat, Chandigarh and the rest | Unchanged |
Gurgaon and Noida are the ones worth flagging. Both sit in the National Capital Region and both are expensive places to rent, but neither is Delhi, so both remain on 40%. Proximity to a metro has never counted; only the city itself.
Two Bengaluru employees, two completely different outcomes
Take two people, both renting in Bengaluru, both on the old regime. The only difference is how their pay is structured relative to their rent.
Employee A: the change does nothing
Basic + DA of ₹9,60,000 a year (₹80,000 a month), HRA of ₹4,80,000, rent of ₹30,000 a month (₹3,60,000 a year).
| Test | FY 2025-26 (40%) | FY 2026-27 (50%) |
|---|---|---|
| Actual HRA received | ₹4,80,000 | ₹4,80,000 |
| Rent − 10% of basic | ₹2,64,000 | ₹2,64,000 |
| % of basic | ₹3,84,000 | ₹4,80,000 |
| Exemption (lowest) | ₹2,64,000 | ₹2,64,000 |
The rent test binds in both years. The percentage-of-basic figure rose by ₹96,000 and it made no difference whatsoever, because it was never the smallest number. Employee A's taxable HRA stays ₹2,16,000 and their tax bill is unchanged.
Employee B: the change is worth ₹18,720
Basic + DA of ₹6,00,000 a year (₹50,000 a month), HRA of ₹3,00,000, rent of ₹30,000 a month.
| Test | FY 2025-26 (40%) | FY 2026-27 (50%) |
|---|---|---|
| Actual HRA received | ₹3,00,000 | ₹3,00,000 |
| Rent − 10% of basic | ₹3,00,000 | ₹3,00,000 |
| % of basic | ₹2,40,000 | ₹3,00,000 |
| Exemption (lowest) | ₹2,40,000 | ₹3,00,000 |
Here the 40% figure was the binding constraint, so lifting it to 50% raises the exemption by ₹60,000 and drops taxable HRA from ₹60,000 to zero. At a 30% slab plus 4% cess that is ₹18,720 saved in the year.
Same city, same rent, same change in the law — one gets nothing, the other gets ₹18,720. The variable is the ratio of rent to basic salary. Broadly: the higher your rent relative to basic, the more likely the percentage test is binding and the more the upgrade is worth. Both examples above were computed with our HRA Exemption Calculator, and you can reproduce them by toggling the metro switch.
The regime problem
All of this is old-regime only. HRA exemption does not exist under the new regime, which is the default and which carries a ₹75,000 standard deduction and lower slab rates. So the real question isn't "how much HRA can I exempt" — it's whether your total old-regime deductions, HRA included, beat what the new regime gives you for free.
For a lot of salaried people they don't. The new regime makes salary up to ₹12.75 lakh effectively tax-free once the standard deduction and the Section 87A rebate are applied, and beating that with deductions takes a substantial HRA claim plus a full ₹1.5 lakh of Section 80C. The expanded metro list nudges the maths toward the old regime for high-rent employees in the four new cities, but it doesn't settle it. Run both regimes before choosing.
New paperwork from April 2026
The same rules replace Form 12BB with Form 124 from 1 April 2026, and the disclosure requirements around rent claims tightened. Form 124 asks for your relationship with the landlord.
That is aimed squarely at rent paid to parents or a spouse. The arrangement remains legal — but it needs to be real: an actual rent agreement, rent genuinely transferred by bank, the landlord declaring the income on their own return, and ideally the property actually owned by them. Cash "rent" to a parent who never declares it was already risky; from April 2026 it is also explicitly disclosed.
Keep the landlord's PAN if annual rent exceeds ₹1,00,000 — that requirement is unchanged and is still the most common reason an HRA claim gets queried.
One timing trap
The return you file in mid-2026 is for FY 2025-26, when Bengaluru, Hyderabad, Pune and Ahmedabad were all still non-metro. The expanded list applies to FY 2026-27 income, filed in 2027. If you're in one of the four new cities, the benefit shows up in your 2026-27 TDS from April 2026 onward — not in the ITR you're filing this July.
What to actually do
- Work out which of the three tests binds for you before assuming anything changed. If it's the rent test, the news is irrelevant to your tax bill.
- Re-run old vs new regime if you're in one of the four new cities with high rent — this is the group most likely to have their answer flip.
- Update your declaration with your employer for FY 2026-27 so the higher exemption is reflected in monthly TDS rather than claimed back a year later.
- Tighten your documentation if you pay rent to a relative, ahead of Form 124.