TL;DR
The draft Income Tax Rules, 2026 propose a significant shift for salaried professionals by expanding the 50% House Rent Allowance (HRA) tax exemption to four new cities: Bengaluru, Hyderabad, Pune, and Ahmedabad. Historically, this higher exemption ceiling—calculated under the old tax regime—was restricted to the traditional metros of Delhi, Mumbai, Kolkata, and Chennai, while other cities were capped at 40%
Why This Matters
This change acknowledges that rental costs and income growth in these rising tech hubs now rival traditional metros. For employees in the tech and startup sectors, this proposal could lead to:
- Reduced Taxable Income:A higher ceiling allows for larger rent-related deductions.
- Increased Take-Home Pay: Lower tax liability results in better monthly cash flow and disposable income.
- Regime Competitiveness:The 50% HRA cap makes the old tax regime more attractive compared to the new regime, which offers no HRA exemptions
Key Considerations
It is vital to note that these are draft rules, not yet formally notified, and subject to change. Additionally, benefits only apply to those choosing the old tax regime with proper documentation, such as rent receipts and landlord PANs.
Understanding the 2026 income tax rule updates and what they mean for salaried professionals
For many urban salaried employees in India, House Rent Allowance (HRA) is one of the largest exemptions you can claim under the old income tax regime. Traditionally, the most substantial HRA benefit — an exemption of up to 50% of your salary for HRA tax calculations — was restricted to the four largest metropolitan centres: Delhi, Mumbai, Kolkata, and Chennai.
However, as part of the draft Income Tax Rules, 2026, the tax authorities have proposed expanding this list to include four more fast-growing urban hubs: Bengaluru, Hyderabad, Pune, and Ahmedabad. If implemented, this change could materially affect take-home pay, rental affordability, and salary structuring for employees in these cities — particularly those in the tech, startup, and knowledge-services sectors, where rents are high relative to salaries.
In this article, we’ll explain:
- What the HRA rules are and how they work
- What changed in the draft rules
- Why it matters for professionals in Pune, Bengaluru, and Hyderabad
- Practical implications and careful considerations
Slow Down: What HRA Exemption Actually Means
Before unpacking the proposed changes, it’s important to understand how the HRA tax exemption works under the old tax regime:
Under current income tax rules, the exempt portion of HRA is calculated as the least of these three figures:
- Actual HRA received from your employer
- Excess of rent paid over 10% of your salary
- A fixed percentage of your salary, depending on whether you live in a metro or non-metro city
Traditionally:
- Metro cities such as Delhi, Mumbai, Kolkata, and Chennai used 50% of their salaries to meet the third condition.
- Non-metro cities were capped at 40% of the salary for the same measure.
The exemption is available only under the old tax regime; the new regime does not allow anHRA exemption at all.
What it means in plain terms: If you live in a city with a 50% HRA cap, you get a higher possible ceiling when calculating your rent-related exemption, potentially lowering your taxable income more than in a city with a 40% cap.
What’s Changing in 2026: Inclusion of New ‘Metros’
The draft Income Tax Rules, 2026 — tabled as part of the implementation of the new Income-tax Act — propose a significant expansion of the cities eligible for the 50% HRA exemption under the old regime. The proposed list now includes:
- Mumbai, New Delhi, Chennai, Kolkata (existing metros)
- Bengaluru, Hyderabad, Pune, Ahmedabad (new additions)
Under these draft rules, if you are a salaried employee living and renting a house in any of these eight cities, your HRA tax exemption ceiling would be based on 50% of your salary (basic + dearness allowance) instead of the lower 40% rule that applied to cities like Jaipur, Chandigarh, and Kolkata (before).
Important context: These changes are currently part of the Draft Income Tax Rules, 2026 — they are proposed, not yet formally notified. The final rules may vary after stakeholder feedback and legal approvals.
Why This Matters Specifically for Pune, Bengaluru, and Hyderabad
Cities like Pune, Bengaluru, and Hyderabad share three critical characteristics that distinguish them from other urban centres:
- Rapid income growth — Especially among tech professionals and knowledge workers
- High rental costs — Driven by IT/tech clusters, student populations, and job inflows
- A large share of HRA-eligible salaried workforce — With many people on structured pay slips
Despite these trends, under the old rules, these cities were still treated like non-metros for HRA tax purposes. That meant many employees were capped at a 40% salary factor, reducing the potential tax relief they could claim — even though real rents in these cities often rivaled those in Delhi or Mumbai.
With the proposed expansion:
- Professionals in these cities can claim an exemption based on 50%their of salary in the tax calculation
- That directly reduces taxable income on the rent component
- It can translate into meaningfully higher take-home pay, especially for those in higher tax brackets and paying substantial rent.
Example Spotlight:
If you’re renting in Bengaluru and paying high rent relative to your salary, the shift from 40% to 50% in the hypothetical HRA calculation can result in thousands of rupees more in tax exemption every year — though exact savings depend on rent paid, salary structure, and personal tax position.
How This Impacts Take-Home Pay and Financial Planning
Here’s why this development matters practically:
1. Enhanced Tax-Efficient Salary Structuring
In metros with the 50% exemption, a greater portion of your HRA can be shielded from tax — particularly relevant if HRA forms a large part of your CTC.
2. Improved Monthly Cash Flow
By reducing taxable income, your monthly tax liability decreases. For professionals in Pune, Hyderabad, and Bengaluru — especially those in their 20s and 30s with nascent savings — that boost in disposable income can influence decisions on rent, EMIs, savings, and even family planning.
3. Rental Decisions Become Less Tax-Distorting
Previously, some employees might have chosen slightly cheaper neighbourhoods solely to maximise their HRA exemption. With the same 50% ceiling available inlargerr cities, that distortion may be reduced.
4. Old Regime Becomes Comparatively More Attractive
Many financial planning discussions in recent years have centered on whether the new tax regime is better than the old one. With higher allowances and exemptions (such as the expanded 50% HRA), the old regime becomes more competitive for those who can utilise these exemptions.
Caveat: These benefits apply only if you are under the old tax regime and your salary structure includes HRA.
Nuances to Be Aware Of — Not Everyone Benefits Equally
This change sounds compelling, but in personal finance and tax planning, the details matter:
1. Draft Rules ≠ Final Rules
These provisions are draft and subject to change. The government hasn’t formally notified them, so you should not make irrevocable financial decisions solely on these projections.
2. New Regime Still Exists
HRA exemption is not available under the new tax regime. So if you are already on the new regime, this expanded 50% cap will not affect your tax computation.
3. Compliance Still Matters
To claim HRA exemptions at filing time, proper documentation — rent receipts, rental agreements, and, in some cases, the landlord’s PAN — is often required when rents exceed certain thresholds.
4. Individual Circumstances Dictate Outcomes
Your actual tax savings depend on:
- Your salary break-up
- Actual HRA received
- Actual rent paid versus salary
- Choice of tax regime
- Other deductions claimed
Thus, while the proposed expansion widens the ceiling, the real benefit is personal and specific.
A Cautious, Practical Takeaway for Tech-Heavy Salaried Professionals
For tech professionals — especially in Pune, Bengaluru, and Hyderabad — this draft rule expansion signals that the income tax framework is trying to align exemptions with economic and urban growth realities. These cities now often function as economic peers of Delhi and Mumbai, with similar rental pressures.
This change, if enacted, acknowledges that reality.
But for personal tax planning, keep these principles in view:
- Neither tax rule changes nor employer salary structuring should drive your life goals alone.HRA relief is a factor, not a foundation of your financial plan.
- Understand your entire financial picture. Decisions about rent, career moves, savings, and investments should consider your long-term goals, liquidity needs, and risk tolerance — not just tax optimisation.
- Stay updated on formal notifications. Draft proposals are helpful guides, but final legal text matters for actual compliance.
Final Words
The expansion of the 50% HRA exemption to Pune, Bengaluru, and Hyderabad reflects how India’s tax framework is evolving with its economic geography. For urban salaried employees, especially those in the tech and services sectors, this means potential relief and higher take-home pay — but only under the old tax regime and subject to compliance requirements.
If you are unsure how this aligns with your personal financial strategy — whether to remain in the old tax regime, how much rent exemption you can truly claim, or how this fits into your broader goals — it’s worth assessing your situation comprehensively or speaking with a qualified financial or tax advisor.
