A Proposed Change That Could Put Real Money Back in Tech-City Paychecks
If you rent a home in Bengaluru, Pune, Hyderabad, or Ahmedabad, a proposed change to the Income-tax Rules could increase your House Rent Allowance (HRA) exemption starting FY 2026-27. The Draft Income-tax Rules, 2026 propose expanding the list of cities eligible for the higher 50% HRA exemption from four metros to eight, adding these four fast-growing cities to the existing list of Delhi, Mumbai, Kolkata, and Chennai. For a salaried renter in one of these cities, the difference between a 40% and a 50% exemption cap can translate into tens of thousands of rupees in additional tax-free income each year.
But there is a critical caveat that you must understand before you change your tax planning: as of July 2026, this is a draft proposal, not a notified final rule. The expansion appears in the Draft Income-tax Rules, 2026, and some payroll providers have begun treating it as effective from April 1, 2026 , but the authoritative trigger is a final notification by the Central Board of Direct Taxes (CBDT). Until that notification is confirmed, treat the 8-city expansion as proposed, not guaranteed.
This guide explains exactly how the HRA exemption works, why moving a city from the 40% bucket to the 50% bucket matters, walks through the math for a Bengaluru renter, and covers the compliance rules, the landlord PAN requirement and the Old-Regime-only restriction, that trip up even careful taxpayers.
Warning
The 8-city HRA expansion described here is based on the Draft Income-tax Rules, 2026, a proposal. Some sources and payroll systems treat it as effective from April 1, 2026 , while others describe it as still proposed. Do not rely on the 8-city figures as settled law until the CBDT issues a final notification. Verify the current status on the Income Tax Department's official portal before filing.
How the HRA Exemption Actually Works
The HRA exemption is one of the most valuable salary components for Indian renters, but it is frequently misunderstood. The exemption is not simply the HRA your employer pays you. It is the least of three amounts, calculated under Section 10(13A) of the Income-tax Act and the corresponding rules :
- Actual HRA received from your employer.
- A percentage of your basic salary : 50% of basic salary (plus dearness allowance, if applicable) if you live in a metro city, or 40% if you live anywhere else.
- Rent paid minus 10% of basic salary : the excess of your annual rent over 10% of your annual basic salary.
The exemption is the smallest of these three numbers. Any HRA above the exempt amount is added to your taxable income.
The proposed 8-city change affects only the second component, the percentage cap. It raises the cap from 40% to 50% of basic salary for renters in the four newly added cities. Whether that actually increases your exemption depends on which of the three components is the smallest in your case.
The Proposed 8-City List: Who Moves Up
Under the existing rules, only four cities qualify for the 50% cap: Delhi, Mumbai, Kolkata, and Chennai. The Draft Income-tax Rules, 2026 propose adding four more: Bengaluru, Hyderabad, Pune, and Ahmedabad.
| City | Current Cap | Proposed Cap (Draft) |
|---|---|---|
| Delhi | 50% | 50% (unchanged) |
| Mumbai | 50% | 50% (unchanged) |
| Kolkata | 50% | 50% (unchanged) |
| Chennai | 50% | 50% (unchanged) |
| Bengaluru | 40% | 50% (proposed) |
| Hyderabad | 40% | 50% (proposed) |
| Pune | 40% | 50% (proposed) |
| Ahmedabad | 40% | 50% (proposed) |
| All other cities | 40% | 40% (unchanged) |
City HRA caps: current vs proposed
This is a recognition of economic reality. Bengaluru and Hyderabad, in particular, have rental markets that rival or exceed the traditional metros, driven by their concentration of technology and services employment. A 40% cap in a city where rents have surged is increasingly out of step with actual housing costs.
Note
The classification follows the city as defined for HRA purposes, which is tied to the location of your residence, not your employer's headquarters. If you live in Bengaluru and work remotely for a Mumbai company, your exemption is based on your Bengaluru residence.
Case Study: Ananya's Bengaluru HRA, Before and After
Let's quantify the impact with Ananya, a software engineer living in Bengaluru. Her salary structure for FY 2026-27 is:
- Basic salary : ₹9,00,000 per year
- Dearness allowance : ₹0
- HRA received : ₹4,50,000 per year
- Annual rent paid : ₹4,20,000 (₹35,000/month)
The Three-Component Test
We compute all three components and take the least.
Component 1 — Actual HRA received: ₹4,50,000
Component 2 — Percentage of basic salary:
- Under current rules (40%, non-metro) : 40% × ₹9,00,000 = ₹3,60,000
- Under proposed rules (50%, metro) : 50% × ₹9,00,000 = ₹4,50,000
Component 3 — Rent minus 10% of basic:
- Rent paid : ₹4,20,000
- Less 10% of basic : ₹90,000
- Component 3 : ₹3,30,000
The Exemption Result
| Component | Current (40%) | Proposed (50%) |
|---|---|---|
| 1. Actual HRA | ₹4,50,000 | ₹4,50,000 |
| 2. % of basic | ₹3,60,000 | ₹4,50,000 |
| 3. Rent − 10% basic | ₹3,30,000 | ₹3,30,000 |
| Exemption (least) | ₹3,30,000 | ₹3,30,000 |
Ananya's three-component test, current vs proposed
Here is the surprise: Ananya's exemption does not change, even though Bengaluru moves to the 50% bucket. Why? Because her limiting component is Component 3 (rent minus 10% of basic = ₹3,30,000), not the percentage cap. Raising the cap from 40% to 50% raised Component 2, but Component 3 was already the smallest, so it still governs.
This is a key lesson: the 8-city change only helps you if the percentage-of-basic component was your binding constraint. If your rent is low relative to your salary, or your HRA is low, the higher cap may make no difference at all.
Case Study 2: Rohan, Where the 50% Cap Actually Bites
Now consider Rohan, also in Bengaluru, but with a different structure where the percentage cap is the binding constraint:
- Basic salary : ₹12,00,000 per year
- HRA received : ₹7,00,000 per year
- Annual rent paid : ₹7,20,000 (₹60,000/month)
The Three-Component Test
Component 1 — Actual HRA: ₹7,00,000
Component 2 — Percentage of basic:
- Current (40%) : 40% × ₹12,00,000 = ₹4,80,000
- Proposed (50%) : 50% × ₹12,00,000 = ₹6,00,000
Component 3 — Rent minus 10% of basic:
- ₹7,20,000 − ₹1,20,000 = ₹6,00,000
The Exemption Result
| Component | Current (40%) | Proposed (50%) |
|---|---|---|
| 1. Actual HRA | ₹7,00,000 | ₹7,00,000 |
| 2. % of basic | ₹4,80,000 | ₹6,00,000 |
| 3. Rent − 10% basic | ₹6,00,000 | ₹6,00,000 |
| Exemption (least) | ₹4,80,000 | ₹6,00,000 |
Rohan's exemption: where the 50% cap actually bites
For Rohan, the change is significant. His exemption rises from ₹4,80,000 to ₹6,00,000, an additional ₹1,20,000 of tax-free income. If Rohan is in the 30% tax bracket under the Old Regime, that is roughly ₹36,000 in additional tax savings (plus applicable cess).
The contrast between Ananya and Rohan is the whole story of this reform: it is a targeted benefit that helps high-rent, high-HRA renters in the newly added cities, and does nothing for those whose exemption is already capped by their actual rent. Use our HRA Exemption Calculator (8 Cities) to run the three-component test for your own salary and see which constraint binds for you.
The Old-Regime-Only Restriction
There is a second gate that determines whether any of this matters to you: the HRA exemption is available only under the Old Tax Regime. Under the New Tax Regime, which has lower slab rates but eliminates most exemptions and deductions, HRA is fully taxable.
This creates a decision that goes well beyond HRA. To claim the HRA exemption, you must opt for the Old Regime, which means you also need to weigh other exemptions and deductions like Section 80C investments, Section 80D health insurance premiums, and the standard deduction trade-offs. For many taxpayers, the New Regime's lower rates win out unless they have substantial deductions.
Important
If you are in the New Tax Regime, the 8-city HRA change is irrelevant to you, HRA is fully taxable regardless of which city you live in. The benefit only accrues to Old-Regime taxpayers with meaningful HRA and rent. Run a full regime comparison before deciding; our guide on the Old vs New Tax Regime in India walks through the complete trade-off.
The Landlord PAN Rule: The ₹1,00,000 Threshold
A compliance requirement that catches many taxpayers off guard is the landlord PAN disclosure rule. If your annual rent exceeds ₹1,00,000, you must report your landlord's Permanent Account Number (PAN) to your employer to claim the HRA exemption.
- Annual rent up to ₹1,00,000 : No landlord PAN required.
- Annual rent above ₹1,00,000 : You must obtain and report your landlord's PAN.
- If the landlord has no PAN : You must obtain a signed declaration from the landlord along with their name and address, and the landlord may need to file a declaration in the prescribed form.
This rule matters because, in the four newly added cities, rents frequently exceed ₹1,00,000 per year. A Bengaluru apartment at ₹35,000/month is ₹4,20,000/year, well above the threshold. If you cannot produce your landlord's PAN, your employer may be unable to give you the full HRA exemption through payroll, forcing you to claim it later when filing your return, with the documentation in hand.
Caution
Claiming HRA without genuine rent payments, or with inflated rent and a fake or unrelated PAN, is a well-known audit trigger. The Income Tax Department cross-verifies landlord PANs and can disallow the exemption, demand back taxes, and levy penalties. Only claim HRA on rent you actually pay, to a real landlord, with verifiable documentation.
Path 1: Through Your Employer (Form 124 Payroll Declaration)
You submit your rent details, rental agreement, and rent payment receipts to your employer via Form 124 (which replaces the legacy Form 12BB under the Draft Income-tax Rules 2026). Crucially, Form 124 requires an explicit declaration of your relationship with the landlord (e.g., parent, spouse, or non-relative). If paying rent to family members, this relationship must be explicitly disclosed alongside the landlord's PAN (required for annual rent exceeding ₹1,00,000) and bank transfer records. The employer then reduces your taxable salary by the exempt HRA amount when calculating monthly TDS.
Path 2: While Filing Your Return (Tax Year 2026-27)
If your employer did not account for the full exemption or you could not submit Form 124 in time, you can claim the exemption directly when filing your return. Under the newly notified Income-tax Act, 2025 (effective April 1, 2026), the traditional dual terminology of "Previous Year" and "Assessment Year (AY)" has been unified into a single "Tax Year". For income earned in FY 2026-27, your return is filed simply for Tax Year 2026-27. The exempt HRA amount is claimed under the salary section against verifiable documentation.
What This Means for Different Renter Profiles
The proposed change affects renters differently. Here is a quick guide by situation.
High-Rent Tech-City Renter (Bengaluru, Hyderabad, Pune, Ahmedabad)
You are the primary beneficiary if your percentage-of-basic component was the binding constraint. Run the three-component test. If Component 2 was your limiter, your exemption rises. If Component 3 (rent minus 10% of basic) was already lower, you may see no change, like Ananya.
Renter in a Non-Listed City (e.g., Gurugram, Noida, Kochi)
No change for you. Your cap remains 40% unless your city is added in a future notification. Note that Gurugram and Noida, despite high rents, are not in the proposed 8-city list, a point of ongoing debate.
New-Regime Taxpayer
No benefit. HRA is fully taxable under the New Regime regardless of city. Your decision is whether the Old Regime's exemptions (including HRA) outweigh the New Regime's lower rates.
Homeowner
HRA exemption does not apply if you live in your own home. If you own a home in one city but rent in another for work, the rules are more complex; consult a tax advisor.
The Bigger Picture: Why HRA Reform Is in the Air
The 8-city proposal is part of a broader modernization of India's income-tax framework. The Income-tax Act, 2025, which replaces the decades-old 1961 Act, takes effect from April 1, 2026, and the Draft Income-tax Rules, 2026 flesh out how various provisions, including HRA and Form 124 declarations, will operate. The government has signaled an intent to align tax rules with current economic realities, including the rise of new metro-grade cities.
For taxpayers, the practical takeaway is to stay alert to final notifications. The draft rules are a strong signal of direction, but the binding authority is the CBDT's final notification. Our India ITR Filing Guide for Tax Year 2026-27 covers the broader filing environment, including Form 26AS and AIS reconciliation, that you will need to work through alongside any HRA claim.
Tip
Document everything now, regardless of the draft status. Keep rent receipts, your rental agreement, proof of rent payment (bank transfers are ideal), and your landlord's PAN. If the 8-city rule is notified, you will be ready to claim the higher exemption immediately. If it is not, your documentation still supports your existing 40% claim.
The Bottom Line
The proposed expansion of the 50% HRA exemption to eight cities is good news in principle for renters in Bengaluru, Hyderabad, Pune, and Ahmedabad, but it is not the universal windfall the headlines suggest. Two gates stand between you and the benefit. First, the rule must clear from draft to final CBDT notification. Second, the higher cap only helps if the percentage-of-basic component was actually limiting your exemption, which, as Ananya's case shows, is not always true. Add the Old-Regime-only restriction and the landlord PAN requirement, and the practical benefit narrows further. The smart move is to run the three-component test for your own numbers, document your rent thoroughly now, and watch for the final notification. If the rule lands, you will be positioned to claim every rupee you are entitled to. If it stalls, your paperwork still protects your current claim.
