HRA Tax Exemption May Expand to More Cities Under 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, as per the draft Income-tax Rules, 2026.

At present, salaried employees living in Mumbai, Delhi, Kolkata and Chennai can claim HRA exemption of up to 50% of their salary. Employees in all other cities are eligible for a lower limit of 40%.

If the proposed rules are implemented, the 50% exemption category may cover more fast-growing cities where rental costs have risen sharply in recent years.

Which Cities May Get the 50% HRA Benefit?

Under the draft rules, the following cities may be included in the 50% HRA exemption category:

• Mumbai
• Delhi
• Kolkata
• Chennai
• Hyderabad
• Pune
• Ahmedabad
• Bengaluru

For employees living in any other city, the exemption limit will remain 40% of salary.

This change reflects how cities like Bengaluru, Hyderabad and Pune have grown into major employment centres, with rental costs often similar to metro cities.

How HRA Exemption is Calculated

As per Rule 279 of the draft Income-tax Rules, 2026, the tax-exempt HRA will be the lowest of these three amounts:

1. The actual HRA received during the period
2. Rent paid minus 10% of salary
3. 50% of salary (for the eight listed cities) or 40% of salary (for other locations)

For HRA calculations, “salary” includes:

• Basic pay
• Dearness allowance (if applicable as per employment terms)

It does not include other allowances or perquisites. 

Who Will Benefit the Most?

If implemented, this proposal is likely to benefit a large number of salaried employees living in cities such as Bengaluru, Hyderabad, Pune and Ahmedabad, where rent has increased significantly over the last few years.

The change may reduce taxable income and increase take-home pay for many taxpayers who currently fall under the 40% limit despite paying high rent.

Read more: Urban Company Partners with HDFC Pension to Bring NPS Cover to 50,000+ Gig Workers.

Conclusion

The draft Income-tax Rules, 2026 suggest a major HRA relief move by expanding the 50% exemption category to more cities. If the proposal becomes law, it could bring meaningful tax savings for salaried employees in India’s fast-growing urban centres. Taxpayers should track updates closely, as the new rules are expected to take effect from April 1 under the upcoming tax framework.

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