Big HRA relief on cards: 50% tax exemption may cover more cities under new draft Income-tax Rules 2026

The government is planning to expand the higher House Rent Allowance (HRA) tax exemption to more cities under the old income-tax regime, according to the draft Income-tax Rules, 2026. At present, salaried employees in Mumbai, Delhi, Kolkata and Chennai are allowed to claim HRA exemption of up to 50% of their salary, while those living in other locations are eligible for a lower limit of 40%.

Under the proposed changes, cities such as Hyderabad, Pune, Ahmedabad and Bengaluru will also be brought under the 50% category, reflecting their growth as major employment hubs and the sharp rise in rental costs. Employees residing in any other city will continue to be eligible for the 40% limit.

As per Rule 279 of the draft Income-tax Rules, 2026, the amount of HRA that can be claimed as tax-exempt will be the lowest of the following three amounts:

• the actual HRA received during the relevant period;

• the excess of rent paid over 10% of the employee’s salary; or

• 50% of salary for employees posted in Mumbai, Kolkata, Delhi, Chennai, Hyderabad, Pune, Ahmedabad and Bengaluru, and 40% of salary for all other locations.

( Source: Draft income tax rules 2026)

For this purpose, “salary” will include basic pay along with dearness allowance, where applicable under the terms of employment, but will exclude other allowances and perquisites. The exemption will apply only for the period during which the employee actually occupied the rented residential accommodation during the tax year.

“Including more developed cities in the metro category would ease the tax burden on salaried employees and make HRA benefits fairer. Tax rules need to reflect how India’s urban landscape has evolved. HRA benefits currently favour a few metro cities, even though rental costs in many fast-growing urban centres are comparable. Expanding the metro classification would create a more balanced system.”

“Rents have risen sharply in cities like Bengaluru, Hyderabad, Pune and Ahmedabad, but HRA limits haven’t kept pace. Extending the 50% exemption to these cities would better match today’s living costs.”

If implemented, the move is expected to reduce taxable income and increase take-home pay for a large number of salaried taxpayers living in fast-growing urban centres.