HRA Tax Exemption Now Covers Eight Cities in India from April 2026

The Income-tax Rules, 2026, notified by the Central Board of Direct Taxes on March 20, 2026, have expanded the list of cities eligible for the higher 50 percent House Rent Allowance exemption from four to eight. Effective April 1, 2026, salaried employees in Bengaluru, Pune, Hyderabad, and Ahmedabad now qualify for the same 50 percent HRA deduction that was previously available only to employees in Delhi, Mumbai, Chennai, and Kolkata. This change recognises the rapid urbanisation and rising rental costs in India's growing technology and business hubs, and it has practical implications for employers and employees across the country.

How HRA Exemption Works Under Indian Tax Law

House Rent Allowance is a component of salary paid by employers to help employees meet rental expenses. Under the tax rules, the HRA exemption is calculated as the least of three amounts: the actual HRA received, the actual rent paid minus 10 percent of salary, or 50 percent of salary for employees in specified metro cities (now eight cities) and 40 percent for all other locations. The city classification directly affects the third limb of this calculation. Before the 2026 amendment, employees in Bengaluru paying the same rent as employees in Mumbai received a lower maximum exemption simply because of the city classification. The expansion corrects this anomaly by acknowledging that rental markets in these four additional cities have reached levels comparable to the original four metros.

Which Employees Benefit Most from the Change

The employees who stand to gain the most are those in Bengaluru, Pune, Hyderabad, and Ahmedabad whose HRA exemption was previously capped at 40 percent of salary. For a salaried employee with a basic salary of Rs 10 lakh per annum, the difference between the 40 percent and 50 percent thresholds is Rs 1 lakh, which translates to a meaningful reduction in taxable income. The benefit is most pronounced for employees in the mid-to-senior salary ranges who live in high-rent areas of these cities. Employees in the IT corridor of Bengaluru, the financial districts of Hyderabad, and the automotive and IT hubs of Pune are likely to see the highest absolute tax savings. Employees in smaller towns and cities not on the expanded list will continue to be subject to the 40 percent threshold.

Employer Obligations: Updating Payroll and TDS Calculations

Employers with employees in the four newly added cities must update their payroll systems and TDS calculation logic to reflect the higher 50 percent threshold from the first payroll cycle of the 2026-27 tax year. Failure to do so will result in excess TDS being deducted from employee salaries, creating unnecessary compliance burden for employees who will then need to claim refunds. HR and payroll teams should also update their investment declaration forms and HRA exemption calculators to incorporate the expanded city list. For companies with multi-city operations, the payroll system must correctly identify the city of employment for each employee and apply the appropriate threshold. This is particularly relevant for companies with hybrid or remote work arrangements, where the city of the registered office may differ from the city where the employee actually resides.

Practical Takeaways for Employees and Employers

Salaried employees in Bengaluru, Pune, Hyderabad, and Ahmedabad should immediately update their HRA declarations with their employer to ensure the higher 50 percent threshold is applied from April 2026 onwards. Employees should retain rent receipts and rental agreements as supporting documentation, as the higher exemption may attract greater scrutiny during assessment. Employers should issue an internal communication to employees in the affected cities, informing them of the change and the steps required to claim the benefit. Tax consultants advising salaried clients should review existing salary structures and recommend optimisation where the expanded HRA exemption creates additional tax planning opportunities. The change is straightforward in its application, but requires proactive action from both employers and employees to capture the benefit from the start of the tax year.