HRA Exemption: 8 Cities Now Qualify for 50% Exemption – A Complete Practical Guide

For over two decades, only four cities in India qualified for the 50 percent HRA exemption under Section 10(13A) of the Income Tax Act: Delhi, Mumbai, Kolkata, and Chennai. Every other city, including Bangalore, Hyderabad, Pune, and Ahmedabad, was classified as non-metro and limited to 40 percent of basic salary for the HRA exemption calculation.

From April 1, 2026, this changes. Under the Income Tax Rules 2026, four additional cities have been added to the metro category for HRA exemption purposes: Bangalore, Hyderabad, Pune, and Ahmedabad. This is one of the most practically significant changes for salaried professionals in these cities and deserves careful attention from tax practitioners advising clients in these locations.

This article explains the updated HRA framework, quantifies the tax impact with worked examples, clarifies the transition for FY 2025-26 ITR filing, and highlights compliance considerations under the new rules.

The HRA Exemption Framework: Section 10(13A)

House Rent Allowance exemption is calculated as the minimum of three conditions:

1. Actual HRA received from employer during the year
2. Rent paid minus 10% of salary (basic salary plus Dearness Allowance plus commission as percentage of turnover)
3. 50% of salary for metro cities, or 40% of salary for non-metro cities

The third condition is where the April 2026 change applies. Previously, only Delhi, Mumbai, Kolkata, and Chennai qualified for the 50 percent threshold. From FY 2026-27, Bangalore, Hyderabad, Pune, and Ahmedabad are also included in this category.

It is important to note that HRA exemption is available only under the old tax regime. Employees who have opted for the new tax regime cannot claim HRA exemption regardless of their city of residence.

Updated Metro City Classification from April 1, 2026

Tax Impact Calculation: Before and After April 2026

The practical impact of this change is significant for professionals in the four newly added cities. Here is a worked example for a Bangalore-based IT professional.

Case: Salaried professional, Bangalore, Old Tax Regime

• Basic salary: Rs. 60,000 per month (Rs. 7,20,000 per year)
• HRA received: Rs. 30,000 per month (Rs. 3,60,000 per year)
• Rent paid: Rs. 25,000 per month (Rs. 3,00,000 per year)

In this example, both FY 2025-26 and FY 2026-27 result in the same exemption because Condition 2 (rent paid minus 10% of salary) is the binding constraint. The metro city reclassification has no additional impact here.

However, consider a scenario where rent paid is higher:

Case: Higher rent scenario, Bangalore

• Basic salary: Rs. 80,000 per month (Rs. 9,60,000 per year)
• HRA received: Rs. 40,000 per month (Rs. 4,80,000 per year)
• Rent paid: Rs. 40,000 per month (Rs. 4,80,000 per year)

Here again, Condition 2 is binding. Now consider a scenario where the metro reclassification does make a meaningful difference:

Case: Where metro reclassification directly impacts exemption

• Basic salary: Rs. 1,00,000 per month (Rs. 12,00,000 per year)
• HRA received: Rs. 60,000 per month (Rs. 7,20,000 per year)
• Rent paid: Rs. 50,000 per month (Rs. 6,00,000 per year)

Key insight for practitioners: The metro reclassification makes a direct difference only when Condition 3 (percentage of basic salary) is the binding constraint. In most practical scenarios, Condition 2 (rent paid minus 10% of salary) is the binding constraint, making the city classification irrelevant to the final exemption amount. However, for higher income professionals with structured CTC where basic salary is a larger proportion, Condition 3 can become relevant.

Transition Period: FY 2025-26 vs FY 2026-27

A critical point that must be clearly communicated to clients and employees:

• For FY 2025-26 ITR filing (due July 31, 2026): The old 4-city metro rule applies. Bangalore, Hyderabad, Pune, and Ahmedabad remain non-metro for this filing. Use 40% of basic salary for Condition 3.
• For FY 2026-27 onwards (ITR due July 31, 2027): The new 8-city rule applies. Bangalore, Hyderabad, Pune, and Ahmedabad qualify for 50% of basic salary under Condition 3.

Employers in the newly added cities should update their payroll software immediately for April 2026 salary processing. Employees who have already submitted investment declarations to their employers should verify that HRA is being computed at 50% for the third condition from April 2026 onwards.

New Compliance Requirements Under HRA from April 2026

The Income Tax Rules 2026 also introduced tighter compliance requirements for HRA claims. Form 12BB has been replaced by Form 124 for investment declarations from April 2026.

Key new requirement: If annual rent paid exceeds Rs. 1,00,000 and the rent is paid to a family member (including parents, spouse, or siblings), the taxpayer must now disclose the relationship with the landlord in Form 124. This requirement comes under the Draft Income Tax Rules 2026.

This does not make the claim invalid. The HRA exemption remains available for rent paid to family members, provided the rental arrangement is genuine and documented with a rent agreement, rent receipts, and the landlord declares the rental income in their own ITR.

Practitioners advising clients who pay rent to family members should ensure:

• Formal rent agreement is in place
• Monthly rent receipts are maintained
• Rent is paid through banking channels (not cash)
• Landlord (family member) declares rental income in their ITR
• Relationship with landlord is disclosed in Form 124 when declaring HRA to employer

Practical Checklist for April 2026 HRA Compliance

For tax professionals and employers:

4. Update payroll software to apply 50% HRA rate for Bangalore, Hyderabad, Pune, and Ahmedabad from April 1, 2026.
5. Advise employees in newly added cities to verify their April 2026 salary slip reflects the updated rate.
6. For FY 2025-26 ITR filing, use 40% for all four newly added cities. The 50% rate applies from FY 2026-27 only.
7. Clients paying rent to family members must disclose relationship in Form 124 and ensure documentation is in order.
8. Use the HRA exemption calculator at finlecture.in to verify calculations under the updated rules.

Conclusion

The expansion of the metro city list for HRA exemption from 4 to 8 cities is a welcome rationalization that recognizes the economic reality of India’s technology and business hubs. For the millions of salaried professionals in Bangalore, Hyderabad, Pune, and Ahmedabad who pay significant rent in these cities, this change improves alignment between the tax framework and actual living costs.

The practical tax benefit will vary case by case depending on which of the three conditions is the binding constraint. Tax practitioners should calculate HRA exemption under both the old and new rules for clients in these cities to determine actual impact for FY 2026-27 planning.

The transition period requires careful attention. FY 2025-26 returns must still use the old 4-city framework. Only from FY 2026-27 onwards does the 8-city framework apply.

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About the Author: Diksha Chawla is the founder of FinLecture (finlecture.in), a financial education platform helping salaried professionals, freelancers, and small business owners understand income tax, GST, and personal finance in India. She holds an MBA in Finance with 7 years of experience in finance and taxation education.