Rent relief ahead? how 50% HRA deduction could change tax for you

The government has released draft Income tax Rules 2026 proposing a major change in how House Rent Allowance (HRA) exemption is calculated for salaried taxpayers in select cities. The rules add Bengaluru, Hyderabad, Pune and Ahmedabad into the list of metro cities for HRA purposes. This will make those earning HRA in these cities eligible for the higher 50% exemption limit under the old tax regime.

What’s the proposal?

• Rule 279 of the draft expands the definition of metro city for HRA to eight cities.
• Total cities in 50% list (for HRA purposes) will be: Mumbai, Delhi, Kolkata, Chennai, Bengaluru, Hyderabad, Pune and Ahmedabad.
• For residents of these 8 cities, the maximum HRA exemption remains ‘least of three’ but the percentage cap becomes 50% of salary (basic + eligible DA) and for all other cities it stays at 40%.
• How is computation formula ‘least of three’ calculated? 

Exemption is the least of

• actual HRA received,
• rent paid minus 10% of salary,
• 50% of salary (for these 8 cities) or 40% for others.
• The revised rules are expected to be implemented from 1^st April 2026 (FY 2026‑27).

What is the situation today?

• As of now, only four cities, Delhi, Mumbai, Kolkata and Chennai, are treated as metros for HRA, with a 50% salary cap.
• All other locations, including Bengaluru, Hyderabad, Pune and Ahmedabad, get only 40% of salary as the cap for HRA exemption under Section 10(13A) (old regime).
• This means a Bengaluru or Hyderabad salaried employee currently gets the same HRA deduction as someone in a smaller non‑metro city, despite far higher rents.

Why these 4 cities matter for HRA deduction

These four cities Bengaluru, Hyderabad, Pune and Ahmedabad have a far higher concentration of salaried taxpayers and investors than most other non‑metro cities. Rising rents plus dense taxpayer bases make them natural candidates for upgraded HRA treatment.

High taxpayer & wealth concentration

• These are major economic hubs (IT, startups, manufacturing, BFSI), so salaried professionals are heavily clustered here, unlike in most Tier‑2 cities.
• City wise mutual fund Asset Under Management (AUM) data released by AMFI (Association of Mutual Funds in India) for 2025, shows Bengaluru and Pune in the top 5 nationwide & Ahmedabad in the top 10 investors, signalling high wealth density and formal financial participation.
• Overall, only about 6.7% of India’s population files ITRs, but the bulk of these filers are concentrated in Tier‑1 and large Tier‑2 cities.

What will change for people in these four cities?

Once the draft rules are notified and effective:

• A salaried person living in Bengaluru, Hyderabad, Pune or Ahmedabad, receiving HRA and paying rent, will be allowed to compute exemption using 50% of basic salary instead of 40%.
• This widens the ceiling, so in high rent cases a bigger portion of HRA can become tax free.
• The benefit will be most visible for:
  • mid-to-high income salaried employees,
  • with a meaningful HRA component, and
  • paying substantial rent relative to salary in these four cities.

In short, for the same salary and rent, the HRA exemption number can be higher post change than it is today, directly lowering taxable income for such employees.

Old vs new regime: who gains more?

• HRA exemption is available only under the old tax regime, under the new regime, HRA is fully taxable and you cannot claim this deduction at all.
• The draft HRA change therefore benefits only those who either continue in or move to the old regime from FY 2026‑27 onwards.
• New regime taxpayers see no direct benefit from this proposal because their HRA remains fully taxed regardless of city.

So, the clear winner from this change is the salaried taxpayer (opting for old tax regime) living in one of these eight cities and paying significant rent.

Will this push more people towards the old regime?

This proposal will likely make the old regime more attractive for a specific segment:

• Salaried individuals in the 8 HRA metro cities with:
  • high rent outgo,
  • sizeable HRA in their salary structure, and
  • ability to claim other deductions (80C, 80D, home loan interest, etc.).
• For them, the combined impact of higher HRA exemption plus other deductions could outweigh the lower slab rates of the new regime.

As a large chunk of India’s taxpaying, salaried middle class is concentrated in these four high rent cities, reclassifying them into the 50% HRA category is likely to pull more people back towards the old regime.

However, it may not trigger a universal shift:

• Employees with low HRA, low rent, or minimal deductions may still find the new regime simpler and more tax efficient despite missing this HRA benefit.
• The decision will remain case specific. The HRA tweak nudges more rent paying metro employees to run the old vs new comparison more seriously but does not automatically make the old regime better for everyone.
  From FY 2026‑27, if you live in these 8 cities and pay a high rent, it’s worth recalculating tax under both regimes.