Salaried employees are expected to enjoy a higher income tax exemption from the next financial year, as the draft Income Tax Rules 2026 propose a major change in House Rent Allowance (HRA) deductions under the old tax regime.
Under the new rules, scheduled to come into effect from April 1, 2026, income tax authorities have proposed the addition of four more cities to the list of metros. These cities include Bengaluru, Hyderabad, Pune and Ahmedabad.
As per the existing income tax rules, salaried employees in only four metro cities of Delhi, Mumbai, Kolkata and Chennai are allowed HRA exemption of 50%. With the expansion of the list of metros, salaried taxpayers in these four cities will also be eligible for higher HRA relief.
Apart from the metros, salaries taxpayers living in other cities are eligible for 40% HRA exemption under the old tax regime.
Rule 279 of the draft rules, which defines ‘metro city' for HRA calculation, now includes a total of eight cities. The rule lays down the parameters for special allowances under Schedule III of the draft framework.
The proposed overhaul would place Bengaluru, Hyderabad, Pune and Ahmedabad in the same bracket as the four established metros, allowing salaried employees to claim 50% HRA exemption.
According to the proposal, the method for computing HRA relief will remain unchanged. The exemption will be determined as the lowest of three figures: the actual allowance received, the excess of rent paid over 10% of salary, or a prescribed share of salary linked to the employee's city of residence.
The proposal signals an effort by the government to update HRA norms in response to India's shifting economic landscape. In the past ten years, cities including Bengaluru, Hyderabad and Pune have emerged as powerhouse centres for technology, start-ups, manufacturing and services, drawing in a sizeable salaried population.
HRA, which is treated as a part of an employee's cost-to-company package, is intended to offset rental outgoings. Under the new tax regime, salaried taxpayers cannot claim HRA exemption. By contrast, the old regime permits partial relief under Section 10(13A) of the Income Tax Act, 1961.
While the newer framework offers lower slab rates, it is only those who opt for the old system who can avail themselves of the HRA exemption.
Also Read: Income Tax Rules 2026: Here's What Could Change For Taxpayers
The draft guidelines also preserve enhanced transport allowance provisions for employees with disabilities. Staff who are visually impaired, hearing and speech impaired, or orthopaedically disabled and stationed in notified metro cities will be entitled to a transport allowance of up to Rs 15,000 plus dearness allowance (DA). In other cities, the corresponding limit stands at Rs 8,000 along with DA.
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