Synopsis: The Draft IT-Rules 2026 propose expanding the 50% HRA exemption to 4 more cities including Bengaluru, Hyderabad and 2 more that have seen sharp rise in rental housing costs in recent years.
The draft Income Tax Rules, 2026, also creates a paradigm change in House Rent Allowance (HRA) exemptions to salaried taxpayers who choose the old tax regime. At present, four cities, namely, Delhi, Mumbai, Kolkata and Chennai are eligible to be called metro and hence the employees are entitled to upto 50 percent of HRA exemption of their Basic salary plus Dearness Allowance (DA). But for rest of the cities, it is restricted to 40%.
This is a proposal that was put forward in Rule 279 in the Schedule III which is in response to long-term demands in high-rent cities such as Bengaluru. It is geared towards offering equality to the professionals who experience high housing rates in the expanding urban centers of India. It was celebrated as a big bonus by Bengaluru South MP Tejasvi Surya who had been championing it since 2022.
Present-day HRA Exemption Structure
Calculation of HRA exemption is based on the minimum of three figures, namely, actual HRA received, rent paid less 10 percent of salary, and 50 percent/40 percent salary according to city classification. To metro inhabitants, this limit is 50% of (basic salary + DA); the non-metros receive 40%.
The design encourages employers to offer more HRA in more expensive locations. Nonetheless, the technical meaning of metro has been a disadvantage to employees in such cities as Bengaluru, where average rent is matched to that of Mumbai but exemption is limited to a lower level.
In order to claim it during the filing of ITR, employees are required to attach rent receipts and landlord PAN (where the rent is greater than Rs 1 lakh every year). The exemption is only made available under the old regime; the new regime does not provide HRA deduction at all.
Key Changes in Draft Rules
The draft also reclassifies the metro cities and Bengaluru, Hyderabad, Pune, and Ahmedabad have been included in the list. The new table stands at: Mumbai, Kolkata, Delhi, Chennai, Hyderabad, Pune, Ahmedabad, and Bengaluru-all of them are 50% exemption eligible. Other locations remain at 40%.
Such expansion has put HRA limits at par with economic realities in Tier-1 cities. As an example, the tech employees of Bengaluru, who have to spend more than 30-40 percent of their income on rent, would be saving thousands of dollars per year in taxes.
The regulations also ensure higher transport allowances to the differently-abled employees: 15,000 + DA in metros (then 8,000 + DA elsewhere) on the blind, deaf, mute or orthopaedically challenged personnel.
Updated 50% HRA Exemption List
| City | Previous Status | New Status (Draft 2026) |
| Mumbai | 50% | Metro (50%) |
| Delhi | 50% | Metro (50%) |
| Kolkata | 50% | Metro (50%) |
| Chennai | 50% | Metro (50%) |
| Bengaluru | 40% | Metro (50%) |
| Hyderabad | 40% | Metro (50%) |
| Pune | 40% | Metro (50%) |
| Ahmedabad | 40% | Metro (50%) |
All other cities retain 40% cap.
Also read: Top 4 High-Growth Airport Corridors Delivering 70–120% Property Returns in 2026
Implications for Taxpayers
The newly added cities would allow salaried individuals 10% more exemption on their HRA component. In the case of a person who earns a basic salary of Rs 1 lakh per month, it represents an additional labour allowance of Rs 10,000-1.2 lakh per month (better as an annual exemption), which amounts to a savings of Rs 12,000-36,000 in taxes at the different slab rates.
This is an advantage to the IT centers such as Bengaluru and Hyderabad which are inhabited by millions of renters. But, it is not yet announced after taking public opinion on the draft rules. Employers can also change the salary structure as they wish but claims must be accompanied by evidence of residence in the city listed.
Stakeholder Reactions
MP Tejasvi Surya cheered the inclusion saying it will allow the residents of Bengaluru to reap the benefits equal to that of Mumbai, Delhi, Kolkata, and Chennai. He also applauded the disability provisions because they brought inclusivity.
The newspapers such as Times of India and Deccan Herald called it a big tax cut in favor of lakhs of employees. Pressures in these cities in terms of rental had increased after the Union Budget.
Conclusion
An increased list of exemption of 50% HRA in the draft is a pro-taxpayer reform that will help reduce the tax burden in eight major cities as the cost of living increases. During the time they are awaiting the official gazette notification, they are supposed to test their salary slips and get some documents ready. This reform strengthens the attractiveness of the old regime, which may adjust the tax decisions in FY 2026-27.
Written By Jayanth R Pai
