Income Tax Rules 2026: HRA Expansion to Eight Metros and Digital Rupee as Valid Payment Mode

The Income Tax Rules, 2026, notified by the Central Board of Direct Taxes, have replaced the Income Tax Rules, 1962, with effect from April 1, 2026. Among the most practically significant changes are the expansion of the House Rent Allowance (HRA) metro city classification from four cities to eight, and the formal recognition of the Reserve Bank of India's Digital Rupee as a prescribed mode of electronic payment for tax-related purposes. These changes, contained within a streamlined framework of 333 rules (down from over 500 under the old regime), directly affect salaried employees, employers, and taxpayers across the country.

HRA Metro City Expansion: Four New Cities Added

Under the erstwhile Income Tax Rules, 1962, only four cities qualified as metro cities for the purpose of computing HRA exemption under Section 10(13A) of the Income Tax Act: Mumbai, Delhi, Kolkata, and Chennai. Employees working in these cities could claim HRA exemption up to 50 per cent of their salary, while employees in all other cities were limited to 40 per cent. The Income Tax Rules, 2026, have expanded the metro city list to include Hyderabad, Bengaluru, Pune, and Ahmedabad. Employees in these four cities can now claim HRA exemption at the higher 50 per cent threshold. This change reflects the economic reality that these cities have grown into major urban centres with rental costs comparable to the original four metros. Employers must update their payroll systems and TDS computation to reflect the new classification from Tax Year 2026-27 onwards.

Digital Rupee Recognised as Prescribed Electronic Payment

For the first time in the history of Indian income tax rules, the Central Bank Digital Currency (CBDC), popularly known as the Digital Rupee, has been officially included as a prescribed mode of electronic payment. The RBI launched the Digital Rupee pilot in December 2022, and its gradual adoption has now received regulatory recognition under the tax framework. Transactions made through the RBI's Digital Rupee platform will qualify for the purposes of provisions that require or incentivise electronic payments. This includes deductions under various sections that mandate payment through prescribed electronic modes, compliance with cash transaction limits under Section 269SS and 269T equivalents under the new Act, and adherence to TCS and TDS provisions that prescribe electronic payment thresholds. The inclusion of the Digital Rupee alongside existing modes such as RTGS, NEFT, UPI, and debit cards provides a clear legal basis for its use in tax-relevant transactions.

Other Key Changes in the 2026 Rules

Beyond HRA and the Digital Rupee, the Income Tax Rules, 2026, introduce several other notable changes. The Children's Education Allowance has been increased from Rs 1,200 per year per child to Rs 3,000 per month per child (Rs 36,000 per year per child), applicable for a maximum of two children. The Hostel Expenditure Allowance has been raised from Rs 300 per month per child to Rs 9,000 per month per child. All income tax forms have been renumbered under a clean numeric system, replacing the old alphanumeric system. For example, the PAN application form (previously Form 49A) is now Form 93, the investment declaration form (previously Form 12BB) is now Form 124, and the TDS certificate for salary (previously Form 16) is now Form 130. The Updated Return form, previously ITR-U, has been renamed ITR-UN. The concept of Tax Year replaces the dual Previous Year and Assessment Year framework, reducing confusion for taxpayers.

Practical Takeaways for Taxpayers and Employers

Salaried employees in Hyderabad, Bengaluru, Pune, and Ahmedabad should recalculate their HRA exemption claims for Tax Year 2026-27 at the 50 per cent threshold and inform their employers accordingly. Employers must update payroll and TDS systems to reflect the expanded metro city list and revised allowance limits. Taxpayers who use or plan to use the Digital Rupee for business transactions should note that such payments now qualify as prescribed electronic payments for income tax purposes. All stakeholders should familiarise themselves with the new form numbering system before the filing season begins. The transition from the 1962 Rules to the 2026 Rules is procedurally significant, and early preparation will help avoid compliance issues during the first year of the new framework.