HRA Exemption Now Covers Pune, Bengaluru, Hyderabad — What This Means for Your Tax
Priya works at an IT company in Bengaluru. Basic salary: ₹60,000 a month. Monthly rent: ₹25,000 — which, if you’ve ever looked for a decent 2BHK in Whitefield or HSR Layout, you know is actually on the lower side.
For years, the income tax rules treated Bengaluru like it was some sleepy non-metro — the same category as a tier-3 city where rent might be ₹8,000. Her HRA exemption was capped at just 40% of her basic salary. Meanwhile, her colleague doing the same job in Mumbai walked away with 50%.
That changed on 1 April 2026.
Under the Income Tax Rules 2026, notified by the CBDT on 20 March 2026, Bengaluru, Pune, Hyderabad and Ahmedabad have officially been added to the metro city list for HRA purposes. All four cities now get the same 50% exemption ceiling that Delhi, Mumbai, Kolkata and Chennai have had for decades.
If you live in any of these four cities and pay rent — and you’re on the old tax regime — this is real money back in your pocket.
What this guide covers
What Actually Changed with HRA Exemption
Let’s start with the basics, quickly.
HRA — House Rent Allowance — is a component your employer pays as part of your salary to help cover rent. Under Section 10(13A) of the Income Tax Act (now governed by the Income Tax Act, 2025), a portion of that HRA is exempt from tax — meaning it doesn’t get added to your taxable income.
Until 31 March 2026, only four cities qualified for the higher exemption ceiling of 50% of salary: Delhi, Mumbai, Kolkata, and Chennai. Every other city — including Bengaluru, Pune, Hyderabad, and Ahmedabad — was capped at 40%, regardless of how high rents actually were.
From 1 April 2026, Rule 279 of the Income Tax Rules 2026 expands the metro city list to eight cities. The four new additions are:
- Bengaluru
- Hyderabad
- Pune
- Ahmedabad
The 50% ceiling now applies to all eight. Every other city and town in India remains at 40%.
The HRA Calculation Formula — The ‘3-Condition Test’
A lot of people think their entire HRA component is tax-free. It isn’t. The HRA exemption is always the lowest of three values. This is the formula that was there before, and it hasn’t changed — only the percentage in condition 3 has shifted for the new metro cities.
Condition 1: Actual HRA received from your employer
Condition 2: Rent paid minus 10% of your salary
Condition 3: 50% of salary (for the 8 metro cities) or 40% of salary (for all other locations)
Important: For HRA purposes, ‘salary’ means Basic + Dearness Allowance (DA) + Commission (if it’s a fixed % of turnover). It does NOT mean your full CTC or gross salary.
Whichever of these three numbers is the smallest — that is your tax-exempt HRA. The rest gets added to your taxable income.
Real Rupee Example: Before vs After for a Pune Employee
Let’s take Rohit, a product manager at a Pune-based firm. Here are his numbers:
- Basic salary: ₹60,000/month (₹7,20,000/year)
- HRA received from employer: ₹25,000/month (₹3,00,000/year)
- Monthly rent paid: ₹22,000 (₹2,64,000/year)
- DA: Nil (private sector)
| FY 2025-26 (Old Rule — 40%) | FY 2026-27 (New Rule — 50%) | |
| Condition 1: Actual HRA received | ₹3,00,000 | ₹3,00,000 |
| Condition 2: Rent paid − 10% of salary | ₹2,64,000 − ₹72,000 = ₹1,92,000 | ₹2,64,000 − ₹72,000 = ₹1,92,000 |
| Condition 3: % of salary | 40% × ₹7,20,000 = ₹2,88,000 | 50% × ₹7,20,000 = ₹3,60,000 |
| HRA Exemption (lowest of three) | ₹1,92,000 | ₹1,92,000 |
In this case, Rohit’s exemption doesn’t change — because Condition 2 (rent minus 10% of salary) is the binding constraint. The city upgrade only matters when Condition 3 was the limiting factor.
Now let’s take Ananya, a software engineer in Bengaluru with higher rent and a bigger HRA:
- Basic salary: ₹80,000/month (₹9,60,000/year)
- HRA from employer: ₹40,000/month (₹4,80,000/year)
- Actual rent paid: ₹38,000/month (₹4,56,000/year)
| FY 2025-26 (Old Rule — 40%) | FY 2026-27 (New Rule — 50%) | |
| Condition 1: Actual HRA received | ₹4,80,000 | ₹4,80,000 |
| Condition 2: Rent paid − 10% of salary | ₹4,56,000 − ₹96,000 = ₹3,60,000 | ₹4,56,000 − ₹96,000 = ₹3,60,000 |
| Condition 3: % of salary | 40% × ₹9,60,000 = ₹3,84,000 | 50% × ₹9,60,000 = ₹4,80,000 |
| HRA Exemption (lowest of three) | ₹3,60,000 | ₹3,60,000 |
Still the same. Condition 2 binds again. Let’s push the rent higher.
Scenario where the city upgrade actually makes a difference:
- Basic: ₹80,000/month (₹9,60,000/year)
- HRA from employer: ₹40,000/month (₹4,80,000/year)
- Rent paid: ₹48,000/month (₹5,76,000/year)
| FY 2025-26 (Old Rule — 40%) | FY 2026-27 (New Rule — 50%) | |
| Condition 1: Actual HRA received | ₹4,80,000 | ₹4,80,000 |
| Condition 2: Rent paid − 10% of salary | ₹5,76,000 − ₹96,000 = ₹4,80,000 | ₹5,76,000 − ₹96,000 = ₹4,80,000 |
| Condition 3: % of salary | 40% × ₹9,60,000 = ₹3,84,000 | 50% × ₹9,60,000 = ₹4,80,000 |
| HRA Exemption (lowest of three) | ₹3,84,000 | ₹4,80,000 |
| Additional exemption from city upgrade | — | +₹96,000 |
| Approx. tax saved (30% slab) | — | ~₹28,800/year |
That’s nearly ₹29,000 extra in Ananya’s pocket — just because Bengaluru is now treated as a metro. For someone in a high-rent situation where the percentage cap was the binding condition, this matters.
This Only Works If You’re on the Old Tax Regime
Here’s the catch — and it’s a big one.
HRA exemption under Section 10(13A) is available only under the old tax regime. If you’ve opted for the new tax regime (which has been the default since FY 2023-24), your entire HRA is fully taxable. The 50% metro upgrade means nothing to you.
Before you assume this change saves you money, check which regime you’re actually in. Log in to your employer’s payroll portal or ask your HR — it should show on your Form 16 or your monthly salary slip under TDS.
If you’re in the new regime and paying significant rent, this might be a good time to run the numbers and see if switching back to the old regime makes financial sense. The HRA benefit, combined with deductions under Section 80C, NPS under 80CCD(1B), and health insurance under 80D, could tip the balance.
One Important Timing Note: Your FY 2025-26 ITR Filing
This is something several people are getting confused about, so let’s be clear.
The new 8-city rule applies from FY 2026-27 (Tax Year 2026-27) onwards — meaning income earned from 1 April 2026.
For your FY 2025-26 income tax return — which you’ll file by 31 July 2026 — the old 4-city rule still applies. If you’re in Bengaluru, Pune, Hyderabad or Ahmedabad, you remain non-metro for that return. Use 40% for Condition 3.
Don’t apply the new rate retrospectively to your FY 2025-26 filing. That would be incorrect and could trigger a notice.
New Compliance Rules: Form 124 and Landlord Disclosure
The expanded city list isn’t the only change. The Income Tax Rules 2026 also tightened how HRA must be declared to your employer.
Form 12BB is out. Form 124 is in.
The investment declaration form that salaried employees submit to their employer — previously Form 12BB — has been replaced by Form 124 from 1 April 2026. The content covers broadly the same ground: HRA, LTA, home loan interest, and deductions under Chapter VI-A. But there are additions.
You must now disclose your relationship with your landlord
This is the most significant new compliance requirement. Under Rule 205 of the Income Tax Rules 2026, when claiming HRA in Form 124, you must now declare your relationship with the landlord — specifically whether the landlord is a relative (parent, spouse, sibling, etc.).
The intent is clear: the government wants to crack down on fake HRA arrangements where rent is ‘paid’ to a family member on paper but never actually changes hands. If you’re paying rent to a parent legitimately — rent agreement in place, payments via bank transfer, parent declaring the income in their ITR — you have nothing to worry about. If the arrangement isn’t genuine, the data trail now exists for scrutiny.
Other documentation requirements (unchanged but worth knowing)
- Landlord’s PAN is mandatory if annual rent exceeds ₹1,00,000 (i.e., monthly rent above ₹8,333)
- Rent receipts (monthly) must be maintained
- A signed rent agreement is strongly recommended
- Payments should ideally be through bank transfer (not cash) for a verifiable trail
Who Benefits the Most — And Who Doesn’t
| Profile | Impact of the Change |
| On old regime, high rent in Bengaluru/Pune/Hyderabad/Ahmedabad, and Condition 3 was the binding limit | Direct and meaningful — exemption ceiling jumps 10% |
| On old regime, but Condition 2 (rent minus 10% of salary) is the binding factor | No change in exemption amount — the higher ceiling doesn’t help |
| On old regime, owns a home and doesn’t pay rent | Zero impact — HRA exemption isn’t applicable |
| On new tax regime | Zero impact — HRA exemption doesn’t exist under the new regime |
| Joining a company now, city in the new metro list | Your employer’s payroll must use 50% from April 2026 — check your salary slip |
The bottom line: this helps the most when you’re paying high rent, on the old regime, and earning a moderate salary — where the 40% cap was actually restricting your exemption below what Conditions 1 and 2 would allow.
A Quick Note on the Old Tax Regime vs New
HRA is one of the reasons many Bengaluru and Pune professionals who pay significant rent still prefer the old tax regime, despite the new one’s lower slab rates.
With the metro upgrade, the old regime becomes even more attractive for renters in these cities. But the right answer depends entirely on your rent amount, your employer’s HRA component, and your other deductions.
The only way to know for sure is to calculate your tax liability under both regimes, ideally before you submit your investment declaration to HR at the start of the financial year. If you want to understand the trade-offs in depth, our old vs new tax regime guide for FY 2026-27 walks through it with numbers.
What to Do Right Now
- Check which tax regime you’re in. Log in to your company’s HR/payroll portal and check your TDS computation. If you’re in the new regime, assess whether the old regime makes sense with the updated HRA benefit.
- If you’re in the old regime and in one of the four new metro cities, verify that your employer’s payroll team has updated the HRA calculation to 50% from April 2026. It should show on your salary slip. If it’s still at 40%, raise it with HR immediately — the correction needs to happen in the April 2026 payroll.
- Submit Form 124 (not Form 12BB) to your employer. Include your landlord’s name, address, PAN (if annual rent exceeds ₹1,00,000), and your relationship with the landlord. Make sure rent receipts and a signed rent agreement are in place.
- For your FY 2025-26 ITR (due July 2026): use the old 4-city rule. Bengaluru, Pune, Hyderabad, Ahmedabad are non-metro for that return. The 50% rate applies only from FY 2026-27.
- Run the 3-condition test on your own numbers. Identify which condition limits your exemption. If Condition 3 (the percentage cap) is currently binding you, this metro upgrade directly increases your tax savings. If Condition 2 (rent minus 10% of salary) is binding, the upgrade won’t change your exemption — but you might want to revisit whether negotiating a higher HRA component with HR makes sense.
- If you pay rent to a parent or relative, ensure the arrangement is genuine: formal rent agreement, bank transfers, and parent declaring rental income in their ITR. With the new disclosure requirement in Form 124, any non-genuine arrangement is significantly riskier.
Related Reading on The Salary Investor
- Old vs New Tax Regime India — Which One Should You Pick?
- HRA Exemption Guide for Salaried Indians — The Full Breakdown
- Section 80C Tax Saving Guide — Where to Invest ₹1.5 Lakh
- NPS vs PPF for Retirement — Which Makes More Sense?
- How to Read Your Salary Slip — CTC, TDS, and What Those Deductions Mean
Disclaimer: This article is based on the Income Tax Rules 2026, notified by the CBDT on 20 March 2026, and the Income Tax Act, 2025, effective from 1 April 2026. All information is as of May 2026. Tax rules are subject to amendment — always verify with the Income Tax Department’s official portal (incometax.gov.in) for the latest notifications. Returns and exemption amounts depend on individual salary structure, rent paid, and the tax regime chosen. This article is for general educational purposes only and does not constitute tax advice. Please consult a SEBI-registered financial advisor or a qualified CA before making any tax-related decisions.
Sources: Income Tax Rules 2026 — CBDT Official Notification, incometax.gov.in (Income Tax Department, March 2026) · Income Tax Act 2025 — Objective and Scope, incometax.gov.in (Income Tax Department, 2026) · HRA Income Tax Exemption 2026 — Rule 279 and 8-City Metro List (ClearTax, April 2026) · Income Tax Rules 2026 — Key Changes Summary (ClearTax, April 2026) · HRA Exemption Rules April 2026 — 50% Benefit for 8 Cities (TaxFetch India, March 2026) · HRA Rules 2026 — 50% Tax Exemption Proposed for 8 Metro Cities (m.Stock, March 2026) · Flash Alert 2026-081 — India Income-tax Rules 2026 (KPMG, March 2026) · Form 124 — New Investment Declaration for Salaried Employees (The Munim, May 2026) · New HRA Rules From April 1, 2026 — PAN and Rent Proof Now Mandatory (Angel One, April 2026) · HRA Exemption Calculation India 2026 — Complete Guide (EZHRM, May 2026)
He figured out most of what he knows about personal finance not from courses or advisors, but from years of reading, making mistakes, and fixing them. The Salary Investor is his attempt to save other salaried Indians the same time and money.
He is not a CA or a SEBI-registered advisor. He writes as a fellow salaried person who has been in the trenches — navigating EPF, ITR, 80C, salary slips, and market volatility.