In this guide
For over two decades, only four cities in India - Mumbai, Delhi, Kolkata, and Chennai - qualified for the 50% HRA exemption. Every other city, including Bengaluru (India's IT capital), Pune (a major tech and manufacturing hub), Hyderabad, and Ahmedabad, was classified as "non-metro" and capped at 40%. This never reflected reality - rents in Bengaluru and Pune often rival or exceed Chennai and Kolkata.
From 1 April 2026, this changes. Rule 279 of the Income Tax Rules, 2026 adds Bengaluru, Pune, Hyderabad, and Ahmedabad to the 50% category. For the millions of salaried professionals in these cities paying significant rent, this means higher HRA exemption, lower taxable income, and real tax savings.
For salaried individuals in Pune and other newly added cities, refer to ITR filing for salary for updated HRA computation guidance under the old regime.
The 8 Cities at 50% HRA
| City | Previous Rate | New Rate (From April 2026) | Status |
|---|---|---|---|
| Mumbai | 50% | 50% | Unchanged - existing metro |
| Delhi | 50% | 50% | Unchanged - existing metro |
| Kolkata | 50% | 50% | Unchanged - existing metro |
| Chennai | 50% | 50% | Unchanged - existing metro |
| Bengaluru | 40% | 50% | NEW - upgraded to metro |
| Pune | 40% | 50% | NEW - upgraded to metro |
| Hyderabad | 40% | 50% | NEW - upgraded to metro |
| Ahmedabad | 40% | 50% | NEW - upgraded to metro |
| All other cities (Noida, Gurugram, Jaipur, etc.) | 40% | 40% | Unchanged - non-metro |
HRA Exemption Formula: Unchanged
The three-condition formula remains the same. HRA exemption = lowest of:
| Condition | Formula | Note |
|---|---|---|
| Condition 1: Actual HRA received | HRA component of salary | As per employer CTC breakdown |
| Condition 2: Rent minus 10% salary | Rent paid - 10% of (Basic + DA) | The binding constraint in most high-rent cases |
| Condition 3: Percentage of salary | 50% of (Basic + DA) for 8 cities; 40% for others | THIS is where the change matters - 50% instead of 40% |
Key: "Salary" for HRA = Basic pay + Dearness Allowance (if part of employment terms). NOT total CTC, NOT gross salary. Excludes all other allowances and perquisites.
Worked Example 1: Pune IT Professional
Profile: Ms. Priya, software engineer in Pune. Old tax regime.
Basic salary: Rs 70,000/month (Rs 8,40,000/year). HRA received: Rs 35,000/month (Rs 4,20,000/year). Rent paid: Rs 28,000/month (Rs 3,36,000/year).
| Condition | FY 2025-26 (Old Rule: 40%) | FY 2026-27 (New Rule: 50%) |
|---|---|---|
| C1: Actual HRA | Rs 4,20,000 | Rs 4,20,000 |
| C2: Rent - 10% salary | Rs 3,36,000 - Rs 84,000 = Rs 2,52,000 | Rs 3,36,000 - Rs 84,000 = Rs 2,52,000 |
| C3: % of salary | 40% of Rs 8,40,000 = Rs 3,36,000 | 50% of Rs 8,40,000 = Rs 4,20,000 |
| Exemption (lowest) | Rs 2,52,000 (C2 is binding) | Rs 2,52,000 (C2 is still binding) |
| Taxable HRA | Rs 1,68,000 | Rs 1,68,000 |
Result: In this case, the exemption is the SAME because Condition 2 (rent minus 10% salary) is the binding constraint in both years. The 50% upgrade only helps when Condition 3 was the binding constraint under 40%.
Worked Example 2: Bengaluru Professional (Where 50% Actually Helps)
Profile: Mr. Raj, Bengaluru. Old tax regime.
Basic + DA: Rs 50,000/month (Rs 6,00,000/year). HRA received: Rs 25,000/month (Rs 3,00,000/year). Rent paid: Rs 22,000/month (Rs 2,64,000/year).
| Condition | FY 2025-26 (40%) | FY 2026-27 (50%) |
|---|---|---|
| C1: Actual HRA | Rs 3,00,000 | Rs 3,00,000 |
| C2: Rent - 10% salary | Rs 2,64,000 - Rs 60,000 = Rs 2,04,000 | Rs 2,64,000 - Rs 60,000 = Rs 2,04,000 |
| C3: % of salary | 40% of Rs 6,00,000 = Rs 2,40,000 | 50% of Rs 6,00,000 = Rs 3,00,000 |
| Exemption (lowest) | Rs 2,04,000 (C2 binding) | Rs 2,04,000 (C2 still binding) |
Result: Again, Condition 2 is binding. But consider if Raj's rent increases to Rs 30,000/month:
C2 would be Rs 3,60,000 - Rs 60,000 = Rs 3,00,000. Under 40% rule: C3 = Rs 2,40,000 would be binding (exemption Rs 2,40,000). Under 50% rule: C3 = Rs 3,00,000, C2 = Rs 3,00,000, C1 = Rs 3,00,000 - all equal at Rs 3,00,000.
Tax saving: Rs 60,000 additional exemption. At 30% slab + cess = approximately Rs 18,720 tax saved per year. This is the real benefit for high-rent payers.
When Does the 50% Upgrade Actually Help?
The 50% vs 40% change only makes a difference when Condition 3 (percentage of salary) was the binding constraint under the old 40% rule. This happens when:
- Rent paid is high relative to salary (rent minus 10% salary > 40% salary)
- HRA received is high (equal to or more than 40% of salary)
- In other words: when the employee pays rent exceeding 50% of basic salary, the 50% upgrade creates meaningful additional exemption
- For employees paying moderate rent (less than 40% of salary), Condition 2 or Condition 1 is typically binding - and the change has zero impact
Professional tax planning services can model all three conditions and determine the actual tax benefit for your specific salary-rent combination.
Compliance Changes: Form 124 and Landlord Disclosure
Along with the HRA upgrade, the Income Tax Rules 2026 introduce tighter compliance requirements:
| Requirement | Old Rule | New Rule (From April 2026) |
|---|---|---|
| Investment declaration form | Form 12BB | Form 124 |
| Landlord relationship disclosure | Not required | Mandatory - must declare relationship with landlord in Form 124 |
| Landlord PAN | Required if rent > Rs 1 lakh/year | Remains required if rent > Rs 1 lakh/year |
| Rent receipts | Required | Required. Must include landlord name, address, PAN (if applicable) |
| Revenue stamp on receipt | Rs 5,000+ receipts | Continues as per stamp law |
Why landlord relationship matters: The new disclosure is designed to curb false HRA claims where employees "pay rent" to family members without genuine rental arrangements. Declaring the relationship (parent, spouse, sibling, etc.) allows the Department to cross-verify with the landlord's ITR. Genuine arrangements (e.g., paying rent to parents who own the house) remain fully valid - but documentation must be airtight.
For individuals managing income tax return filing with HRA claims, ensure Form 124 is submitted to the employer with complete landlord details from April 2026 onwards.
Old Regime vs New Regime: The HRA Decision
HRA exemption is available ONLY under the old tax regime. Under the new regime (Section 115BAC), HRA is fully taxable regardless of which city you live in. The 50% upgrade to 8 cities has zero impact on new regime taxpayers.
| Factor | Old Regime (HRA Available) | New Regime (No HRA) |
|---|---|---|
| HRA exemption | Yes - 50% for 8 cities, 40% for others | No - HRA fully taxable |
| Standard deduction | Rs 50,000 | Rs 75,000 |
| Basic exemption | Rs 2,50,000 | Rs 4,00,000 |
| Tax-free income (approx) | Rs 5-5.5 lakh (with deductions) | Rs 12 lakh (with rebate) / Rs 12.75 lakh (salaried) |
| Chapter VI-A deductions | Available (80C, 80D, etc.) | Limited (80CCD(2) employer NPS only) |
| Best for | High HRA + high deductions (80C, 80D, HP interest) | Moderate-to-low deductions, salary up to Rs 15-18 lakh |
Decision framework: The 50% upgrade makes the old regime relatively MORE attractive for high-rent payers in the 4 new cities. But the new regime's Rs 12.75 lakh tax-free income threshold means many salaried employees - especially those earning less than Rs 15 lakh - still save more under the new regime. Always calculate both. Ensure TDS return filing reflects the correct regime for employer TDS deduction.
Transition: FY 2025-26 vs FY 2026-27
| Period | HRA Metro Cities | Rule | Form |
|---|---|---|---|
| FY 2025-26 ITR filing (due July 2026) | 4 cities: Mumbai, Delhi, Kolkata, Chennai | Old Rule 2A (IT Rules 1962) | Form 12BB |
| FY 2026-27 salary processing (April 2026+) | 8 cities: + Bengaluru, Pune, Hyderabad, Ahmedabad | New Rule 279 (IT Rules 2026) | Form 124 |
| FY 2026-27 ITR filing (due July 2027) | 8 cities | New Rule 279 | Form 124 |
Action items for employers: Update payroll software from April 2026 to apply 50% for Bengaluru, Pune, Hyderabad, and Ahmedabad employees. Generate Form 124 (not old 12BB) for investment declarations. For business payroll compliance, refer to ITR for business.
Common Mistakes to Avoid
Mistake 1: Claiming 50% for Pune/Bengaluru in FY 2025-26 filing. The 50% upgrade applies from FY 2026-27 only. FY 2025-26 ITR (due July 2026) must use 40% for these cities. Using 50% in the FY 2025-26 return will trigger 143(1) adjustment.
Mistake 2: Claiming HRA under the new regime. HRA exemption is not available under Section 115BAC (new regime). If you opted for new regime, the 50% upgrade has zero benefit for you. HRA is fully taxable.
Mistake 3: Assuming all NCR cities are 50%. Delhi is 50%. But Noida, Gurugram, Faridabad, Ghaziabad are NOT in the 8-city list. They remain at 40%. The expansion is city-specific, not region-specific.
Mistake 4: Not disclosing landlord relationship in Form 124. From April 2026, Form 124 requires relationship disclosure. Failure to provide this can result in HRA claim disallowance during processing.
Mistake 5: Using gross salary instead of Basic + DA. The 50% (or 40%) applies to Basic + DA only. Not gross salary, not CTC. Using the wrong salary figure inflates the exemption and triggers scrutiny.
Key Takeaways
From FY 2026-27, 8 cities qualify for 50% HRA exemption: Mumbai, Delhi, Kolkata, Chennai + Bengaluru, Pune, Hyderabad, Ahmedabad. All other cities remain at 40%. Rule 279 of IT Rules 2026.
The HRA formula is unchanged: lowest of (actual HRA, rent - 10% salary, 50%/40% of salary). The 50% upgrade only helps when Condition 3 was the binding constraint under the old 40% rule.
HRA exemption is available ONLY under the old tax regime. New regime (Section 115BAC) = HRA fully taxable. The 50% upgrade has zero impact on new regime taxpayers.
New compliance: Form 124 (replaces 12BB) requires landlord relationship disclosure. PAN of landlord required if rent exceeds Rs 1 lakh/year. Anti-abuse measure for false HRA claims.
FY 2025-26 filing (due July 2026) uses old 4-city rule at 40%. The 50% rate for new cities applies from FY 2026-27 (Tax Year 2026-27) only. Employers must update payroll from April 2026.
Need Help with Income Tax Return Filing?
Maximising HRA exemption requires correct salary definition, accurate rent documentation, landlord PAN compliance, and optimal regime selection. For Pune-based professionals benefiting from the 50% upgrade, professional CA guidance ensures maximum tax savings.
Explore our income tax return filing and tax planning services for HRA-optimised filing.
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