50% HRA Exemption Now Covers Hyderabad, Bengaluru, Pune, Ahmedabad

Which cities qualify for 50% HRA exemption under Income Tax Rules 2026? Income Tax Rules 2026 expanded the 50% HRA city list to eight cities: Mumbai, Delhi, Kolkata, Chennai, Hyderabad, Bengaluru, Pune, and Ahmedabad. The expansion takes effect from FY 2026-27. Employees in these cities filing for FY 2025-26 (AY 2026-27) must still apply the 40% rate for the four newly added cities.

The 2026 overhaul of Income Tax Rules brought one of the most consequential changes to HRA computation in over two decades. For salaried employees in Hyderabad, Bengaluru, Pune, and Ahmedabad, the shift from 40% to 50% basic salary benchmark directly increases the exemption ceiling, reducing taxable salary with no additional compliance burden. Knowing which rate applies to which financial year is critical to filing your ITR correctly.

Which 8 Cities Now Qualify for 50% HRA Exemption

Under Rule 2A of the Income Tax Rules (as amended by Income Tax Rules 2026), the 50% HRA benchmark now covers eight cities:

Original 4 metros (pre-2026):

• Mumbai (including Thane and Navi Mumbai)
• Delhi (including NCR towns under the old gazette)
• Kolkata
• Chennai

4 cities added from FY 2026-27:

• Hyderabad
• Bengaluru
• Pune
• Ahmedabad

All other cities and towns continue at the 40% benchmark.

The practical consequence: a Bengaluru employee with a Rs. 1,00,000 monthly basic salary sees their 50% benchmark rise to Rs. 50,000, versus the earlier Rs. 40,000. Over 12 months, that is a Rs. 1,20,000 increase in the upper ceiling for the exemption calculation, which can translate to meaningful tax savings depending on which of the three prongs of the formula is binding.

One point that frequently causes errors: the expansion is prospective. If you are filing your ITR for AY 2026-27 (FY 2025-26), you were still under the old rules for that year. The 40% rate governs HRA exemptions for Hyderabad, Bengaluru, Pune, and Ahmedabad in that return. Only ITRs for AY 2027-28 (FY 2026-27) will pick up the 50% rate for these four cities.

The HRA Exemption Formula: How to Calculate It

Section 10 13A) of the Income Tax Act exempts HRA received from an employer, subject to Rule 2A. The exemption is the minimum of the following three amounts:

1. Actual HRA received from the employer during the year.
2. 50% of basic salary + DA (for employees in the 8 qualifying cities) or 40% (all other locations). Basic salary here means the salary as per service agreement, excluding allowances and perquisites.
3. Rent paid minus 10% of basic salary + DA. If actual rent paid is Rs. 28,000 per month and basic+DA is Rs. 80,000, this prong gives Rs. 28,000 - Rs. 8,000 = Rs. 20,000 per month.

The least of the three prongs caps the exemption. The balance of HRA received over the exemption is taxable.

Two procedural points:

• DA is included only if the terms of employment explicitly specify that DA forms part of the salary for retirement benefit computation. Many private sector employers pay DA without this condition; in that case, DA is excluded from the base.
• If an employee lives in their own property or does not pay rent, the third prong becomes zero, and no exemption is available regardless of HRA received.

Worked Example: Hyderabad Employee FY 2025-26 vs FY 2026-27

Assumptions: Hyderabad-based IT professional, no DA, no change in salary across years.

FY 2025-26 computation 40% city, old rules apply):

Exempt HRA for FY 2025-26 = Rs. 2,40,000 (least of three) Taxable HRA = Rs. 3,60,000 - Rs. 2,40,000 = Rs. 1,20,000

FY 2026-27 computation 50% city, new rules apply):

Exempt HRA for FY 2026-27 = Rs. 2,40,000 (least of three, third prong still binding) Taxable HRA = Rs. 3,60,000 - Rs. 2,40,000 = Rs. 1,20,000

In this specific example, the third prong (rent paid minus 10% of basic) is the binding constraint in both years, so the actual exemption amount does not change. This is a common outcome where actual rent paid is modest relative to salary. The 50% upgrade only expands the exemption when the second prong was previously the binding constraint, typically when rent paid is high but the employee receives a substantial HRA from the employer. Employees paying rent above Rs. 40,000 per month on a Rs. 80,000 basic would see an actual benefit shift.

See how we compute HRA exemption for you using your actual salary structure and rent receipts.

Old Tax Regime vs New Tax Regime: HRA Only in Old Regime

HRA exemption under Section 10 13A) is available exclusively under the old tax regime. If you have opted for the new concessional tax regime under Section 115BAC, the HRA exemption is disallowed in its entirety, regardless of how much rent you pay or which city you live in.

From FY 2023-24, the new regime became the default. If your employer has not received a specific declaration from you to opt for the old regime, your TDS will be computed under the new regime, and no HRA deduction will be given in Form 16.

For employees whose rent expenditure, HRA receipts, and other deductions (Section 80C, 80D) collectively save more tax than the flat rate reduction under the new regime, opting out of the new regime remains the correct decision. The 50% expansion under Income Tax Rules 2026 makes the old regime marginally more attractive for Hyderabad, Bengaluru, Pune, and Ahmedabad employees, but the comparison must be done on actual numbers, not a general assumption.

New Landlord Disclosure Requirement Under Income Tax Rules 2026

Income Tax Rules 2026 added a landlord disclosure obligation that applies from AY 2026-27 onwards. When claiming HRA exemption in your ITR, you must now provide:

• Landlord's full name as per their PAN or Aadhaar records
• Landlord's PAN (mandatory where annual rent exceeds Rs. 1,00,000, which was already required; now formalized in the ITR schedule)
• Relationship with landlord, if any (spouse, parent, sibling, employer, etc.)

The relationship disclosure addresses a long-standing evasion pattern where rent was paid to relatives without genuine residential tenancy. The Income Tax Department has been denying HRA claims during scrutiny where the rental arrangement lacked substance; the disclosure requirement shifts the documentation burden to the filing stage.

If your landlord does not have a PAN, you must obtain their Aadhaar number and submit a declaration in the prescribed format. Failing to disclose or providing incorrect details can result in the exemption being disallowed during processing or assessment.

Get help with HRA documentation including landlord PAN collection and declaration formats.

How to Claim HRA in Your ITR AY 2026-27

For salaried employees filing ITR 1 or ITR 2 for AY 2026-27:

Step 1: Confirm the correct city category. For Hyderabad, Bengaluru, Pune, and Ahmedabad residents, the applicable rate is 40% for FY 2025-26. Do not apply 50% in this year's return.

Step 2: Collect rent receipts. Monthly rent receipts with the landlord's signature, property address, and amount are required. For rents above Rs. 8,333 per month (Rs. 1,00,000 per year), the landlord's PAN is mandatory.

Step 3: Verify Form 16 Part B. Your employer should have reflected the exempt HRA in Part B under Section 10 13A). If the employer computed exemption under the wrong city category, you must recompute and report the correct figure in your ITR.

Step 4: Complete the landlord disclosure. Under the new rules, the landlord name, PAN, and relationship fields in the ITR are mandatory, not optional.

Step 5: Maintain documentation. Rent agreement, rental receipts, and bank transfer records (strongly recommended over cash payments) must be retained for at least 6 years from the end of the relevant assessment year, as HRA claims are a regular subject of scrutiny notices.

Check our ITR filing plans to have Tax Garden handle the exemption computation, Form 16 reconciliation, and complete ITR filing for a fixed fee.

Sources: Income Tax Act, 1961, Section 10 13A); Income Tax Rules, 1962, Rule 2A as amended by Income Tax Rules 2026 (effective April 1, 2026); CBDT Notification amending Rule 2A and ITR forms for AY 2027-28; Income Tax Department FAQ on HRA and Section 115BAC. Readers should verify computation against their specific salary structure and confirm city categorisation with a qualified Chartered Accountant before filing.