The biggest HRA update in decades is here. Under the new HRA exemption rule 2026, 8 cities now qualify for 50% exemption, and if you live in Bengaluru, Hyderabad, Pune, or Ahmedabad, this change directly puts more money in your pocket. Here is everything you need to know about the metro vs non-metro HRA exemption in India, the new cities added in the HRA metro category, and how to maximise your tax savings starting Tax Year 2026-27.

What Is HRA Exemption?

House Rent Allowance (HRA) is a salary component paid by employers to help salaried employees cover rental costs. By default, the entire HRA received is taxable — but under Section 10(13A) of the Income Tax Act, a portion of it can be claimed as tax-exempt, effectively reducing your taxable income.

The amount you can exempt is not a flat figure. It is the lowest of three specific conditions (explained in Section 5 below). The most impactful of these conditions uses a percentage of your basic salary — and that percentage depends entirely on where you live: 50% for metro cities, 40% for everywhere else.

For decades, only four cities — Delhi, Mumbai, Kolkata, and Chennai — qualified as metros for this purpose. That has now changed.

What Changed: The New 8-City Rule Explained

The Income Tax Rules 2026, notified under the new Income Tax Act 2025, came into effect on April 1, 2026. Among the most significant changes for salaried taxpayers: the list of cities eligible for the 50% HRA exemption has been doubled from 4 to 8 cities.

Four new cities have been elevated to metro status for HRA purposes:

Bengaluru
Hyderabad
Pune
Ahmedabad

This is the first revision to this classification in several decades — and it addresses a long-standing inequity. These cities have seen rent costs climb to levels comparable with the original four metros, yet employees living there were still restricted to the lower 40% exemption ceiling. The new rules correct that gap.

The Updated HRA Metro Cities List (2026)

Sr.No.	City	Status (Pre-2026)	Status (FY 2026-27 Onwards)	HRA %
1	Delhi	Metro	Metro ✅	50%
2	Mumbai	Metro	Metro ✅	50%
3	Kolkata	Metro	Metro ✅	50%
4	Chennai	Metro	Metro ✅	50%
5	Bengaluru	Non-Metro	Newly Metro ✅	50%
6	Hyderabad	Non-Metro	Newly Metro ✅	50%
7	Pune	Non-Metro	Newly Metro ✅	50%
8	Ahmedabad	Non-Metro	Newly Metro ✅	50%
9	All other cities	Non-Metro	Non-Metro	40%

Notable exclusions: Gurgaon, Noida, Surat, Jaipur, Lucknow, Kochi, Indore, and Chandigarh did not make the list and continue to be treated as non-metro cities at 40%.

Metro vs Non-Metro HRA Exemption: Key Differences

The classification matters because it directly determines the ceiling on your HRA exemption, i.e., the maximum amount of HRA that can be shielded from tax.

Parameter	Metro Cities (8 cities)	Non-Metro Cities
HRA % of Salary (Condition 3)	50% of Basic + DA	40% of Basic + DA
Example: Basic ₹60,000/month	₹30,000/month ceiling	₹24,000/month ceiling
Annual difference	₹3,60,000	₹2,88,000
Tax saving (30% bracket)	Up to ₹21,600/year higher	—
Applicable regime	Old tax regime only	Old tax regime only

A 10% swing in the salary percentage may seem small, but for mid-to-senior professionals with higher basic salaries, it can translate to ₹20,000–₹50,000 in additional annual tax savings with zero additional investment.

How HRA Exemption Is Calculated (The 3-Condition Formula)

HRA exemption is always the lowest of the following three amounts:

Condition 1: Actual HRA received from employer

Condition 2: Rent paid minus 10% of salary (Basic + DA + commission on turnover)

Condition 3: 50% of salary (if metro city) OR 40% of salary (if non-metro city)

The exemption equals whichever of these three amounts is the smallest. The remaining HRA received is added to your taxable income.

Step-by-Step Calculation Guide

Note your annual basic salary (and DA, if applicable)
Note the actual HRA received annually from your employer
Calculate the annual rent paid and subtract 10% of your annual salary
Identify your city and apply 50% or 40% of annual salary
The lowest of these three figures is your exempt HRA
Subtract this from total HRA received — the balance is taxable

Real-World Examples: Tax Savings Before vs After

Example 1: Bengaluru IT Professional (Impact of New Rule)

Parameter	FY 2025-26 (Non-Metro)	FY 2026-27 (Metro)
Basic Salary	₹80,000/month	₹80,000/month
HRA Received	₹35,000/month	₹35,000/month
Rent Paid	₹30,000/month	₹30,000/month
Condition 1 (Actual HRA)	₹4,20,000/year	₹4,20,000/year
Condition 2 (Rent − 10% salary)	₹2,64,000/year	₹2,64,000/year
Condition 3 (% of salary)	₹3,84,000 (40%)	₹4,80,000 (50%)
HRA Exempt (Lowest)	₹2,64,000	₹2,64,000

Here, Condition 2 is the binding constraint, so the metro upgrade doesn’t add savings in this specific case. This illustrates an important point: the benefit varies by individual salary and rent structure.

Example 2: Pune Professional Where Metro Upgrade Matters

Parameter	FY 2025-26 (Non-Metro)	FY 2026-27 (Metro)
Basic Salary	₹60,000/month	₹60,000/month
HRA Received	₹30,000/month	₹30,000/month
Rent Paid	₹20,000/month	₹20,000/month
Condition 1 (Actual HRA)	₹3,60,000/year	₹3,60,000/year
Condition 2 (Rent − 10% salary)	₹1,68,000/year	₹1,68,000/year
Condition 3 (% of salary)	₹2,88,000 (40%)	₹3,60,000 (50%)
HRA Exempt (Lowest)	₹1,68,000	₹1,68,000

Again, Condition 2 binds. The key takeaway: the 50% upgrade primarily benefits employees who pay relatively higher rent and whose Condition 3 used to be the limiting factor.

Example 3: High-Rent Scenario in Hyderabad Where the Change Delivers Maximum Benefit

Parameter	FY 2025-26 (Non-Metro)	FY 2026-27 (Metro)
Basic Salary	₹1,00,000/month	₹1,00,000/month
HRA Received	₹50,000/month	₹50,000/month
Rent Paid	₹45,000/month	₹45,000/month
Condition 1 (Actual HRA)	₹6,00,000/year	₹6,00,000/year
Condition 2 (Rent − 10% salary)	₹4,20,000/year	₹4,20,000/year
Condition 3 (% of salary)	₹4,80,000 (40%)	₹6,00,000 (50%)
HRA Exempt (Lowest)	₹4,20,000	₹4,20,000

The practical insight: the metro upgrade matters most when Condition 3 was previously the binding constraint. If Condition 2 (the rent-minus-10% formula) is your lowest figure, the city classification change won’t alter your exemption. Always run all three conditions for your specific numbers.

Important: Which Financial Year Does This Apply To?

This is a critical point that many taxpayers and employers are getting wrong.

Filing	Applicable Rules	Status of 4 New Cities
FY 2025-26 ITR (due July 31, 2026)	Old Income Tax Act, 1961	Non-Metro — use 40%
FY 2026-27 ITR (due August 31, 2027)	New Income Tax Rules 2026	Metro — use 50%

What this means in practice:

If you lived in Bengaluru, Hyderabad, Pune, or Ahmedabad throughout FY 2025-26, you must still use 40% of basic salary for Condition 3 in your ITR filed in 2026.
The 50% benefit kicks in only from April 1, 2026 onwards, i.e., salary earned in FY 2026-27.
Employers in these four cities must update their payroll software from April 2026 to apply the new 50% rate when calculating monthly TDS.

If you have already submitted an investment declaration to your employer for FY 2026-27, verify that HRA is being calculated at 50% for the new metros.

HRA Exemption: Old vs New Tax Regime 2026

This is non-negotiable: HRA exemption under Section 10(13A) is available only under the old tax regime. Employees who have opted for the new tax regime cannot claim HRA exemption — regardless of which city they live in.

Feature	Old Tax Regime	New Tax Regime
HRA Exemption (Sec 10(13A))	✅ Available	❌ Not available
80C Deductions	✅ Available	❌ Not available
Section 80GG (no HRA)	✅ Available	❌ Not available
Zero tax up to ₹12 lakh	❌ Not available	✅ Via 87A rebate
Default Regime	No (must opt in)	Yes (default)

Which regime should you choose? As a rule of thumb: if your combined deductions (HRA + Section 80C + home loan interest + Section 80D) exceed ₹3.5–4 lakh annually, the old regime typically delivers a lower tax outgo. With the 50% HRA expansion for four new cities, the old regime has become more attractive for many professionals in Bengaluru, Hyderabad, Pune, and Ahmedabad. Run both calculations before informing your employer — once you lock in a regime for TDS purposes, you generally cannot change it mid-year.

Eligibility Conditions for Claiming HRA Exemption

You can claim HRA exemption only if all of the following conditions are met:

You are a salaried employee (not self-employed)
You receive HRA as part of your salary package
You actually live in a rented house and pay rent
The rent paid exceeds 10% of your basic salary
You are filing under the old tax regime

If you pay rent but your salary structure does not include an HRA component, you may alternatively claim a deduction under Section 80GG (capped at ₹60,000 per year under the old regime only).

Documents Required for HRA Claim India

Keeping proper documentation is essential — particularly given the tighter compliance requirements introduced in 2026.

Primary Documents

Rent receipts for each month of the year (must include date, amount, landlord signature, and address)
Rent agreement between you and your landlord
Landlord’s PAN — mandatory if total annual rent exceeds ₹1,00,000
Form 124 (replaces the old Form 12BB from April 2026) for investment declarations to your employer

When PAN is Not Available

If your landlord does not have a PAN, obtain a signed self-declaration from them confirming the same (as per CBDT Circular No. 8/2013).

For Bank Transfer Rent Payments

Bank statements showing monthly rent transfers
These provide stronger documentary evidence than cash payment receipts

Rent Receipt Rules for HRA 2026

Receipts should clearly state the property address, tenant name, landlord name, amount paid, and period covered
Revenue stamp is required on receipts above ₹5,000 per receipt
Digital receipts are acceptable if they contain all required information

New Compliance Rule: Landlord Relationship Disclosure

The Income Tax Rules 2026 have introduced a new transparency requirement: taxpayers must now disclose their relationship with their landlord when claiming HRA.

This means you must explicitly state whether the landlord is a parent, relative, friend, or unrelated third party. This is a transparency measure aimed at curbing inflated or fictitious HRA claims, and it applies across all cities — not just the newly added metros.

What this means for you:

If you pay rent to a parent, this must be disclosed and the parent must declare it as rental income in their own ITR
There is no restriction on paying rent to parents — it remains a valid HRA claim strategy
Ensure your rent agreement and receipts clearly reflect the relationship

Special Cases: Paying Rent to Parents, Home Loan, Self-Employed

Paying Rent to Parents

This is a legitimate and popular tax-planning strategy. To make it valid:

Enter into a formal rent agreement with your parents
Transfer rent via bank (avoid cash)
Your parents must declare it as rental income in their ITR
You cannot co-own the property — if you are a joint owner, you cannot pay rent to yourself

Claiming Both HRA and Home Loan Deduction

Yes, this is permitted. If you own a house in one city but rent accommodation in another city due to work requirements, you can simultaneously claim:

HRA exemption for the rented accommodation
Home loan interest deduction under Section 24(b) for the owned property

Self-Employed Individuals

HRA exemption under Section 10(13A) is exclusively for salaried employees. Self-employed individuals and freelancers cannot claim it. They may instead claim a deduction under Section 80GG, subject to conditions and a maximum cap of ₹60,000 per year.

Key Takeaways

The Income Tax Rules 2026 have expanded the HRA metro city list from 4 to 8 cities, effective FY 2026-27.
Bengaluru, Hyderabad, Pune, and Ahmedabad are now classified as metros — employees in these cities can claim 50% of salary under the HRA formula instead of 40%.
The benefit applies only under the old tax regime and only from April 1, 2026 onwards.
The actual tax saving depends on which of the three HRA conditions is your binding constraint. Not every employee in the new metro cities will see a higher exemption.
New compliance requirements include landlord relationship disclosure and use of Form 124 (replacing Form 12BB).
Employees should notify their employers to update payroll for April 2026 processing, and verify TDS calculations immediately.

Frequently Asked Questions (FAQs)

Which 8 cities now qualify for 50% HRA exemption?

The eight cities are Delhi, Mumbai, Kolkata, Chennai (original metros) and Bengaluru, Hyderabad, Pune, and Ahmedabad (newly added from FY 2026-27).

From when does the new 8-city HRA rule apply?

The rule is effective from April 1, 2026, i.e., Tax Year / FY 2026-27. For your FY 2025-26 ITR filed in July 2026, the old 4-city rule still applies.

I live in Bengaluru. Can I claim 50% HRA when filing my ITR in July 2026?

No. Your July 2026 ITR covers FY 2025-26 income, which falls under the old rules. Bengaluru was non-metro for that year, so you use 40%. The 50% benefit applies only from FY 2026-27 (ITR due August 2027).

Can I claim HRA exemption under the new tax regime?

No. HRA exemption under Section 10(13A) is available only under the old tax regime. If you have opted for the new regime, you cannot claim it regardless of your city or rent amount.

How much can I save with the 50% HRA exemption vs 40%?

It depends on your salary and rent. For a basic salary of ₹80,000/month, the metro upgrade raises Condition 3 from ₹38,400 to ₹48,000 per month — a difference of ₹1,15,200 per year. At a 30% tax bracket, that is a potential saving of up to ₹34,560 per year, assuming this condition is the binding one.

What documents do I need if my annual rent exceeds ₹1 lakh?

You must provide your landlord’s PAN to your employer. If the landlord does not have a PAN, a signed self-declaration is required per CBDT Circular 8/2013.

Does Navi Mumbai or Thane qualify for the metro 50% HRA rate?

There is no explicit official clarification from the Income Tax Department. Employers generally treat Navi Mumbai and Thane as part of the Mumbai Metropolitan Region (MMR) and apply the metro rate. Confirm in writing with your HR department and keep a rent agreement showing your exact address.

What is the new landlord relationship disclosure requirement?

Under Income Tax Rules 2026, you must now declare your relationship with the landlord (e.g., parent, relative, third party) when claiming HRA. This applies to all cities and all taxpayers claiming HRA.

Can I claim HRA and home loan interest simultaneously?

Yes — if you own a house in one city and rent accommodation in another city for work, both claims are valid simultaneously. You cannot claim both for the same property in the same city.

My employer hasn’t updated payroll to reflect 50% for Pune. What should I do?

Inform your employer or HR payroll team in writing. If TDS is still calculated at 40%, you can claim the correct (higher) exemption when filing your ITR and receive a refund on excess TDS deducted.

Are cities like Jaipur, Kochi, or Chandigarh likely to be added in future?

The Income Tax Rules 2026 expansion did not include these cities, and there is no official communication indicating further expansion in the near term. These cities continue to attract a 40% HRA ceiling.

Should I switch to the old tax regime just for HRA?

Only if the math supports it. Add up all deductions available to you under the old regime: HRA exemption + Section 80C (up to ₹1.5 lakh) + home loan interest + Section 80D. If total deductions exceed approximately ₹3.5–4 lakh, the old regime generally results in lower tax. Use a tax calculator with your exact figures before deciding.

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New HRA Exemption Rule 2026:8 Cities Now Eligible for 50% HRA Benefit