HRA 50% Exemption Now Covers 8 Cities From FY 2026-27: Bengaluru, Hyderabad, Pune and Ahmedabad Added Under the Income-tax Rules 2026
HRA 50% Exemption Now Covers 8 Cities From FY 2026-27: What the Income-tax Rules 2026 Changed
For the first time in decades, the list of cities where a salaried employee can claim the higher 50% House Rent Allowance (HRA) exemption has been expanded. The Income-tax Rules, 2026, notified to operationalise the Income-tax Act, 2025 with effect from 1 April 2026, add Bengaluru, Hyderabad, Pune and Ahmedabad to the existing four metros. From Financial Year 2026-27 (Tax Year 2026-27), employees living in any of eight cities can claim HRA exemption based on 50% of salary instead of 40%. This is a direct, recurring increase in take-home pay for lakhs of salaried taxpayers in India’s largest non-metro employment hubs, and it changes how every employer must compute monthly TDS on salary from April 2026.
Quick Summary: Key Takeaways
- What changed: The 50% HRA exemption city list expands from 4 cities to 8. Bengaluru, Hyderabad, Pune and Ahmedabad are added to Delhi, Mumbai, Kolkata and Chennai.
- Effective from: FY 2026-27 (Tax Year 2026-27), i.e. salary earned on or after 1 April 2026. The change flows from the Income-tax Rules, 2026, which replaced the Income-tax Rules, 1962.
- Legacy continues for FY 2025-26: For the ITR you file for FY 2025-26 (AY 2026-27), the old four-metro rule still applies. The four new cities remain at 40% for that year.
- Old regime only: HRA exemption is available only under the old tax regime. Employees who have opted for the new tax regime cannot claim HRA exemption, irrespective of city.
- New declaration form: Form 12BB is replaced by Form 124 from 1 April 2026, and now requires disclosure of the employee’s relationship with the landlord for HRA claims.
What Exactly Did the Income-tax Rules 2026 Change?
HRA exemption has always had two moving parts: the governing exemption provision in the Act, and a rule that fixes the percentage of salary used in the exemption formula based on the city of residence. Historically, the exemption sat in Section 10(13A) of the Income-tax Act, 1961, read with Rule 2A of the Income-tax Rules, 1962. The “metro” cities of Delhi, Mumbai, Kolkata and Chennai were granted a 50% rate, while every other city was capped at 40%.
Under the consolidated Income-tax Act, 2025, the HRA exemption is carried into Schedule III (Table, Serial No. 11), and the operative percentages and city list now sit in the Income-tax Rules, 2026, the successor framework to Rule 2A. The substantive policy change is the expanded city list. After more than four decades in which only the four original metros qualified for 50%, four more high-cost employment centres have been recognised.
The 8 cities that now qualify for 50% HRA exemption
| Existing four (50% from before) | Newly added four (50% from FY 2026-27) |
|---|---|
| Delhi | Bengaluru |
| Mumbai | Hyderabad |
| Kolkata | Pune |
| Chennai | Ahmedabad |
Every other city in India continues to use the 40% rate. The change is a one-time expansion of the list, not a blanket increase.
How Is the HRA Exemption Calculated? (The Three-Limb Test)
The HRA exemption itself is the least of the following three amounts, and this formula is unchanged. Only the percentage in the third limb moves from 40% to 50% for the four new cities:
- Actual HRA received from the employer during the year.
- Rent paid minus 10% of salary for the relevant period.
- 50% of salary if you live in one of the eight listed cities, otherwise 40% of salary.
Here “salary” means basic salary plus dearness allowance (to the extent it forms part of retirement benefits) plus any fixed commission on turnover. The exemption is computed on a monthly basis where the relevant facts (rent, HRA, city) change during the year.
A worked example for a Bengaluru employee
Assume an employee in Bengaluru with a basic salary of Rs 1,00,000 per month, HRA of Rs 50,000 per month, and rent paid of Rs 40,000 per month.
| Limb | FY 2025-26 (40% rule) | FY 2026-27 (50% rule) |
|---|---|---|
| Actual HRA received (monthly) | Rs 50,000 | Rs 50,000 |
| Rent paid minus 10% of salary | Rs 30,000 | Rs 30,000 |
| 40% / 50% of salary | Rs 40,000 | Rs 50,000 |
| Exempt HRA (least of three) | Rs 30,000 | Rs 30,000 |
Note the practical lesson: the third limb is often not the binding constraint. In this example the exemption is capped by “rent minus 10% of salary” in both years, so moving from 40% to 50% does not increase the exemption. The 50% rate only helps where the third limb is actually the lowest of the three, typically when rent is high relative to salary. Run the three-limb test on real numbers before promising any employee a higher exemption.
FY 2025-26 vs FY 2026-27: Which Rule Applies When?
This is the most common point of confusion, and getting it wrong creates either an excess exemption (and a notice risk) or short take-home pay. The rule is period-based:
| Period | Governing law | Rate for Bengaluru / Hyderabad / Pune / Ahmedabad |
|---|---|---|
| FY 2025-26 (AY 2026-27), ITR due in 2026 | Income-tax Act, 1961 + Rules, 1962 | 40% |
| FY 2026-27 (Tax Year 2026-27), ITR due in 2027 | Income-tax Act, 2025 + Rules, 2026 | 50% |
So if you are filing a return this year for FY 2025-26, do not apply the 50% rate to the four new cities. The expanded list takes effect only for income earned from 1 April 2026 onwards.
Old Regime Only: The Catch Most Employees Miss
The HRA exemption, including this expanded benefit, is available only under the old tax regime. The new tax regime, which is the default regime, does not allow HRA exemption at all. An employee in Pune who pays substantial rent may still find the old regime more attractive after this change, but that depends on the full deduction profile (Section 80C investments, home loan interest, and so on). The expanded 50% list is therefore a reason to re-run the old-versus-new regime comparison for affected employees, not an automatic win.
Form 124 Replaces Form 12BB: New Compliance for HRA Claims
From 1 April 2026, the investment and exemption declaration that an employee submits to the employer moves from Form 12BB to the new Form 124, governed by Section 392(5)(b) of the Income-tax Act, 2025 read with Rule 205 of the Income-tax Rules, 2026. The purpose is the same, but two practical points matter for HRA:
- Landlord relationship disclosure: Form 124 requires the employee to disclose their relationship with the landlord. This targets arrangements where rent is paid to a spouse, parent or related party. Such arrangements are not automatically disallowed, but they will now be visible to the employer and the department, so the rent must be genuine, supported by an agreement, and ideally paid by banking channel.
- PAN of landlord: Where annual rent exceeds Rs 1,00,000, the landlord’s PAN must continue to be furnished. Keep rent receipts and the lease on file.
Who Is Affected and What Should They Do?
For employers and payroll teams
Payroll software and TDS computation logic must be updated so that employees in Bengaluru, Hyderabad, Pune and Ahmedabad are mapped to the 50% rate for salary paid on or after 1 April 2026. Collect fresh Form 124 declarations for FY 2026-27 and capture the landlord-relationship field. An incorrect 40% mapping for these cities will under-state the exemption and over-deduct TDS, inviting employee grievances.
For salaried employees
If you live in one of the four newly added cities and pay meaningful rent, check whether the 50% limb is actually the binding constraint in your three-limb calculation. If it is, your monthly TDS should fall from April 2026. Submit Form 124 on time, keep rent receipts, and confirm your regime choice, because the benefit exists only under the old regime.
For CAs and tax advisors
Flag affected salaried clients proactively and re-run the regime comparison. For FY 2025-26 returns being filed now, hold the line at 40% for the four new cities and document the change-over so the FY 2026-27 working clearly applies 50%.
HRA 8-City Compliance Checklist
- Identify employees and clients resident in Bengaluru, Hyderabad, Pune or Ahmedabad.
- Update payroll and TDS engines to apply 50% to these cities from 1 April 2026.
- Switch the salary declaration form from Form 12BB to Form 124 for FY 2026-27.
- Capture the landlord-relationship field in Form 124 and collect supporting agreements.
- Re-run the old-versus-new regime comparison for affected employees.
- For FY 2025-26 ITRs, continue to use 40% for the four new cities.
Frequently Asked Questions
Which 8 cities now qualify for the 50% HRA exemption?
Delhi, Mumbai, Kolkata, Chennai, Bengaluru, Hyderabad, Pune and Ahmedabad. The first four already qualified; the last four are added from FY 2026-27 under the Income-tax Rules, 2026.
From which year does the 50% rate apply to Bengaluru, Hyderabad, Pune and Ahmedabad?
From FY 2026-27 (Tax Year 2026-27), meaning salary earned on or after 1 April 2026. For FY 2025-26 these four cities are still at 40%.
Can I claim the expanded HRA exemption under the new tax regime?
No. HRA exemption is available only under the old tax regime. If you have opted for the new regime, you cannot claim HRA exemption regardless of your city.
Does moving from 40% to 50% always increase my exemption?
No. The exemption is the least of three amounts. The 50% rate helps only when the “50% of salary” limb is the lowest of the three, which typically requires rent that is high relative to salary. Always run the full three-limb test.
What is Form 124 and why does it matter for HRA?
Form 124 replaces Form 12BB from 1 April 2026 as the salary declaration form submitted to the employer. For HRA, it adds a mandatory disclosure of the employee’s relationship with the landlord, governed by Section 392(5)(b) of the Income-tax Act, 2025 read with Rule 205 of the Income-tax Rules, 2026.
The Bottom Line
The expansion of the 50% HRA city list to eight cities is one of the most taxpayer-friendly changes in the Income-tax Rules, 2026. The benefit is real but conditional: it applies only from FY 2026-27, only under the old regime, and only where the third limb of the HRA formula actually binds. Employers should update payroll now, and employees in the four new cities should re-examine both their HRA working and their regime choice before the first April 2026 payroll cycle.
For related reading, see our guides on Form 16 for FY 2025-26 and the employer TDS deadline, the Income-tax Act 2025 transition for depreciation under Section 536, and the Section 80-IAC startup tax holiday for FY 2025-26.
Need help re-working salary structures and regime choices?
If you are a CA, founder or finance leader trying to optimise salary structuring, HRA, and the old-versus-new regime decision for your team under the Income-tax Act 2025, our specialists can help you model it cleanly. Get expert guidance on structuring compensation and TDS for FY 2026-27.
Disclaimer: This article is published by Tax Update India for general information and educational purposes only and does not constitute tax or legal advice. The Income-tax Rules, 2026 and the Income-tax Act, 2025 should be read in full, and specific provisions verified against the official text on incometaxindia.gov.in before you act. Please consult a qualified professional for advice on your specific facts.
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