The HRA Rule That Has Not Changed Since 1961 Just Changed
For sixty years, the Income Tax Act treated India as two tiers for HRA purposes: metro and non-metro. Metro meant Delhi, Mumbai, Kolkata, and Chennai. Everywhere else was non-metro. Someone earning the same salary and paying the same rent in Bengaluru claimed less HRA exemption than an equivalent employee in Chennai. The gap was not incidental. Section 10(13A) and the rules under it simply never updated to reflect how Indian cities had changed.
Rule 279 of the Income Tax Rules 2026, notified under the Income Tax Act 2025, expanded the metro list to eight cities from April 1, 2026. Bengaluru, Hyderabad, Pune, and Ahmedabad are now classified as metro cities. The HRA exemption ceiling for employees in these four cities moves from 40% of basic salary to 50%.
The correction reflects a reality that has existed for at least a decade. Average rent in Bengaluru and Hyderabad crossed Chennai and Kolkata levels years ago, driven by the concentration of technology employers. An IT employee in Whitefield paying Rs.35,000 per month in rent claimed less HRA exemption than a counterpart doing similar work in Chennai paying the same rent. That anomaly is now corrected, though it took sixty years.
Jump directly to: HRA formula explained with the three-number calculation. Kavya's example shows old vs new exemption for a Bengaluru employee in rupee terms. City-wise exemption table confirms which cities are now at 50% and which remain at 40%. Old vs new regime decision tells you when HRA makes the old regime worth choosing.
What Exactly Changed from April 1, 2026
Only one number in the HRA formula changed. The formula itself is untouched. The three-way minimum calculation is identical to what it was before April 2026. The only thing that moved is the city percentage used in the second of the three amounts: for Bengaluru, Hyderabad, Pune, and Ahmedabad, that percentage is now 50% instead of 40%.
For a Bengaluru employee with Rs.80,000 monthly basic: under the old rules, the second amount in the formula was Rs.32,000 (40% of Rs.80,000). From April 1, 2026, the same calculation gives Rs.40,000 (50% of Rs.80,000). That Rs.8,000 per month difference, or Rs.96,000 per year, is now available as potential additional exemption. Whether the employee actually benefits depends on whether this second amount is the binding constraint in the three-way minimum.
For employees where this second amount is the binding figure: Rs.96,000 of additional annual exemption saves Rs.29,952 per year at the 30% bracket and Rs.19,968 per year at the 20% bracket. No new investment, no form to fill, no change to rent. The saving comes purely from the city reclassification.
The HRA Exemption Formula: The Least of Three
The formula is unchanged. The HRA exemption is the lowest of three amounts:
- Amount 1: Actual HRA received from your employer during the year
- Amount 2: 50% of (Basic Salary + DA) if you live in a metro city OR 40% of (Basic Salary + DA) if you live in a non-metro city
- Amount 3: Actual rent paid during the year minus 10% of (Basic Salary + DA)
The lowest of these three is the exemption. Everything above that in your HRA component is taxable. Run the calculation annually, not monthly. If your salary, rent, or HRA changed partway through the year, calculate each period separately and add them up. A mid-year salary hike that increases your basic but keeps rent constant changes the binding constraint and your total exemption for the year.
Use Yieldora's HRA Calculator to enter your basic salary, HRA received, rent paid, and city type. The calculator applies the formula and shows your exact exempt amount, taxable amount, and annual tax saving at your bracket.
Metro vs Non-Metro: Complete City List for HRA 2026
The only thing that determines whether you use 50% or 40% in the formula is your city. Here is the complete current list:
| City | HRA Status from Apr 2026 | Exemption Ceiling | Changed? |
|---|---|---|---|
| Delhi (NCR) | Metro | 50% of Basic + DA | No change |
| Mumbai | Metro | 50% of Basic + DA | No change |
| Kolkata | Metro | 50% of Basic + DA | No change |
| Chennai | Metro | 50% of Basic + DA | No change |
| Bengaluru | Metro (new) | 50% of Basic + DA | Up from 40% |
| Hyderabad | Metro (new) | 50% of Basic + DA | Up from 40% |
| Pune | Metro (new) | 50% of Basic + DA | Up from 40% |
| Ahmedabad | Metro (new) | 50% of Basic + DA | Up from 40% |
| All other cities | Non-Metro | 40% of Basic + DA | No change |
Every city not in that list of eight uses 40% as the Amount 2 ceiling. This includes Surat, Jaipur, Lucknow, Chandigarh, Kochi, Coimbatore, Indore, Bhopal, and all other cities in India regardless of size or economic significance. There is no partial classification or population threshold. Either your city is in the eight, or it is at 40%.
Real Example: Kavya, Software Engineer in Bengaluru
Kavya is a software engineer in Bengaluru earning Rs.80,000 monthly basic, receiving Rs.40,000 HRA, and paying Rs.30,000 in rent. Old tax regime. Her three amounts:
Amount 3 is the binding constraint here. Rent minus 10% of basic: Rs.30,000 minus Rs.8,000 equals Rs.22,000. That is lower than both the old Amount 2 (Rs.32,000) and the new Amount 2 (Rs.40,000). The metro upgrade does not change Kavya's exemption at all because it raised a number that was not the lowest. Her exemption stays at Rs.22,000 per month.
This is the key insight most articles miss: The new 50% metro rule only benefits you when Amount 2 (the percentage of basic salary) is the binding constraint in the three-way comparison. If rent minus 10% of basic is lower than 50% of basic, the metro upgrade makes no difference. The rule change helps employees who pay high rent relative to their basic salary. For Kavya to benefit, she would need to either pay higher rent or have a lower basic salary. Use the HRA Calculator to instantly see which of the three amounts is your binding constraint.
When the New 50% Rule Does Make a Real Difference
Ravi earns the same Rs.80,000 basic but pays Rs.45,000 per month in rent. His three amounts:
- Amount 1: Rs 40,000 (HRA received)
- Amount 2 (old 40%): Rs 32,000
- Amount 2 (new 50%): Rs 40,000
- Amount 3: Rs 45,000 minus Rs 8,000 = Rs 37,000
Old exemption: lowest of Rs 40,000, Rs 32,000, Rs 37,000 = Rs 32,000 per month.
New exemption: lowest of Rs 40,000, Rs 40,000, Rs 37,000 = Rs 37,000 per month.
Ravi's monthly exemption increases by Rs 5,000. Annual increase: Rs 60,000. Additional tax saved in the 30% bracket: Rs 18,720 per year. For him, the new metro classification makes a meaningful and immediate difference to his tax liability.
Does the New HRA Rule Make the Old Tax Regime Worth Choosing?
HRA exemption exists only under the old tax regime. Under the new regime, the entire HRA component is added to taxable income regardless of rent paid. The metro upgrade is irrelevant for new regime filers. The question for Bengaluru, Hyderabad, Pune, and Ahmedabad employees is whether the higher 50% exemption shifts the old-versus-new regime calculation in the old regime's favour.
For a Bengaluru employee earning Rs.18 lakh annually with Rs.80,000 basic paying Rs.40,000 monthly rent, the old regime deductions stack as follows: HRA exemption Rs.3.84 lakh (where Amount 2 at 50% is binding), Section 80C Rs.1.5 lakh, NPS 80CCD(1B) Rs.50,000, standard deduction Rs.75,000. Total deductions: roughly Rs.6.6 lakh. The old regime advantage over the new regime on this income and deduction profile is approximately Rs.1 lakh to Rs.1.3 lakh per year in lower tax. The metro upgrade contributed Rs.30,000 to Rs.60,000 of that advantage by raising the HRA exemption.
The decision remains individual. Use Yieldora's Income Tax Calculator to compare both regimes at your exact income, HRA, and deduction profile. The right answer changes based on your rent, loan, and investment situation. Recalculate every April when the financial year begins.
Frequently Asked Questions
Which cities are now metro for HRA exemption from April 2026?
From April 1, 2026, eight cities qualify for the 50% HRA exemption rate under Rule 279 of the Income Tax Rules 2026. The original four are Delhi (including NCR), Mumbai, Kolkata, and Chennai. The four newly elevated cities are Bengaluru, Hyderabad, Pune, and Ahmedabad. Every other city in India remains at 40% of basic salary for the HRA exemption calculation. If you moved to one of the four newly added cities and your employer has not updated the HRA percentage in the payroll system, you are losing exemption you are now entitled to. Submit a written request to HR with a copy of the notification to get it corrected.
How is HRA exemption calculated in 2026?
HRA exemption is the lowest of three amounts: actual HRA received from your employer, actual rent paid minus 10% of basic salary, and the applicable city percentage (50% of basic for metro cities, 40% for non-metro). For a Bengaluru employee with Rs.80,000 monthly basic receiving Rs.30,000 HRA and paying Rs.35,000 in rent: actual HRA is Rs.30,000; rent minus 10% of basic is Rs.35,000 minus Rs.8,000 which equals Rs.27,000; 50% of basic is Rs.40,000. The lowest is Rs.27,000, so that is the monthly exemption. Annual exemption is Rs.3,24,000. Before April 2026, Bengaluru was a non-metro city and the third figure would have been Rs.32,000 (40% of Rs.80,000), but the binding minimum was still the second figure at Rs.27,000. The practical difference of the metro upgrade appears only when rent paid minus 10% basic exceeds 40% of basic but stays below 50% of basic.
How much extra tax will I save in Bengaluru under the new 50% HRA rule?
The comparison depends entirely on your tax bracket, the city, and the relative size of your HRA and loan interest. For most salaried employees in Bengaluru, Hyderabad, Pune, or Ahmedabad earning above Rs.15 lakh annually, the HRA exemption on a Rs.30,000 to Rs.40,000 monthly rent is Rs.3 to Rs.4 lakh per year. Home loan interest deduction under Section 24(b) is capped at Rs.2 lakh per year. If your HRA exemption exceeds Rs.2 lakh, renting costs less in tax terms than owning on a pure tax-saving comparison. The real calculation requires your specific basic salary, HRA amount, actual rent, home loan interest, and EMI to be modelled against each other. Use the Yieldora HRA calculator for your exact numbers.
Is HRA exemption available under the new tax regime in 2026?
HRA exemption does not exist under the new tax regime. Section 10(13A) is explicitly excluded. Under the new regime, your full HRA is added to taxable income regardless of rent paid. If you pay high rent in a metro city, this alone is often enough reason to stay on the old tax regime. A Bengaluru employee with Rs.80,000 basic paying Rs.35,000 monthly rent loses approximately Rs.3.24 lakh in annual exemption by switching to the new regime. At the 30% bracket that is Rs.97,200 per year in additional tax. Whether the new regime's lower slab rates offset this depends on how many other deductions you hold. The HRA calculator on this page runs the comparison for your specific situation.
Can I claim HRA if I pay rent to my parents?
Paying rent to parents is legitimate and legally accepted, provided the arrangement is genuinely documented. Requirements: actual cash or bank transfers from your account to your parent's account every month (not only on paper), a signed rent agreement specifying the property, the monthly amount, and the period, and rent receipts for each month. Your parents must declare the rent received as income from house property in their ITR. If their other income is low, the net tax they pay on the rental income is often less than the tax you save on the HRA exemption, making the arrangement beneficial for the family as a whole. Do not create a paper-only arrangement: tax scrutiny of HRA claims frequently checks bank statement trails.
Can I claim both HRA exemption and home loan deduction in 2026?
Both are claimable simultaneously under the old tax regime in one specific situation: you own a property in a different city from where you work and live on rent. For example, you own a flat in Delhi (where your parents live), have a home loan on it, and rent an apartment in Bengaluru where you are posted. You claim HRA exemption on the Bengaluru rent under Section 10(13A) and home loan interest deduction on the Delhi property under Section 24(b). Both claims are valid. What does not work is claiming HRA exemption on rent paid for the same property you own or for a property in the same city where your self-occupied property sits. The income tax department matches property ownership records with HRA claims during scrutiny assessments.
What documents are needed to claim HRA exemption in 2026?
Rent receipts for every month are the baseline requirement. For annual rent above Rs.1 lakh (Rs.8,333 or more per month), your landlord's PAN is also mandatory. Without the PAN, the employer is required to disallow the exemption for that year. Additionally, keep a signed rent agreement or lease deed specifying the property address, the monthly rent amount, and the tenancy period. If paying by bank transfer, maintain bank statements showing the monthly transfers. Submit these to your employer's payroll team before the annual investment proof deadline, typically December or January. For rent paid to parents, also keep their bank statements showing receipt of funds.
What if my employer has not updated my HRA exemption to the new 50% metro rule?
If your employer's payroll team has not updated to 50% for Bengaluru, Hyderabad, Pune, or Ahmedabad effective April 2026, your TDS has been calculated on a higher taxable income than it should have been. The correction happens at two levels. First, submit a written request to HR immediately with the relevant notification reference asking them to reprocess TDS for the affected months in the current financial year. A compliant employer is obligated to adjust. Second, even if they do not adjust in-year, file your ITR accurately claiming the correct 50% metro HRA exemption. The ITR overrides the employer's TDS computation and the excess TDS deducted will be refunded.