HRA Tax Exemption FY 2026-27: 8 Cities Get 50% — Full Guide

In FY 2026-27, HRA exemption is the smallest of three numbers: the HRA you actually receive, your annual rent minus 10% of basic-plus-DA salary, and 50% of salary if you live in one of 8 metro cities (40% elsewhere). It is available only under the old tax regime — the new regime taxes your entire HRA.

If you pay rent in Bengaluru, Pune, Hyderabad or Ahmedabad, your tax arithmetic quietly changed this year — and it is worth checking whether your employer's declaration forms reflect it. Under the Income Tax Rules 2026, those four cities were upgraded to 50% metro status for House Rent Allowance exemption from April 1, 2026. In plain terms: for a ₹12-lakh-a-year earner in Bengaluru paying ₹40,000 a month in rent, the upgrade can mean ₹18,720 more in tax saved every year — if you claim it correctly. This guide walks through the exact formula, the new city list, the paperwork, and two fully worked examples.

What HRA exemption actually is

House Rent Allowance is a salary component your employer pays to help with rent. Under the old tax regime, part of it is exempt from tax — you do not pay income tax on the exempt portion. The exemption has existed for decades under Section 10(13A) of the Income-tax Act, and it continues under the new Income-tax Act, 2025, which took effect from FY 2026-27. The logic is simple: if you are genuinely paying rent, the government does not want to tax the part of your salary that goes to your landlord — up to a limit. Two hard boundaries to note upfront. First, you must actually pay rent for accommodation you occupy — owners living in their own house cannot claim it. Second, the exemption exists only under the old tax regime. Under the new regime, your entire HRA is added to taxable salary. That single fact makes HRA the deciding factor in the old-vs-new-regime choice for millions of renters.

The least-of-three formula, step by step

The exempt amount is the lowest of these three figures, computed for the financial year: 1. The actual HRA you received from your employer during the year. 2. Rent paid minus 10% of salary — where "salary" means basic pay plus dearness allowance (if DA forms part of retirement benefits), not your gross CTC. 3. 50% of salary if you live in a metro city, 40% if you live elsewhere. Whatever is left of your HRA after the exemption is added back to your taxable salary. The most common error, according to tax guides, is computing the formula on gross salary instead of basic-plus-DA — that inflates the exemption and can trigger a mismatch at filing. A second common error: if your rent or salary changed mid-year, the calculation has to be redone separately for each period, because the exemption applies only for the months you actually occupied rented accommodation.

The 2026 change: 8 cities now qualify for 50%

For years, only four cities qualified for the higher 50% ceiling: Delhi, Mumbai, Chennai and Kolkata. Everyone else — including Bengaluru, Pune, Hyderabad and Ahmedabad — was capped at 40% of basic salary. From April 1, 2026 (FY 2026-27), the Income Tax Rules 2026 upgraded those four cities to metro status, as reported by the Financial Express (via tax partner Ashish Mehta of Khaitan & Co) and multiple 2026 tax guides. The 50% list is now: Delhi, Mumbai, Chennai, Kolkata (existing); Bengaluru, Pune, Hyderabad, Ahmedabad (new from FY 2026-27). All other cities — Jaipur, Kochi, Chandigarh, Surat, Indore and the rest — remain at 40%. One important nuance: the higher city percentage only helps you if condition 3 was the binding constraint in your calculation. If your rent is modest, the "rent minus 10% of salary" leg is usually the bottleneck, and the city upgrade changes nothing. The worked example below shows exactly when it pays.

Worked Example 1: ₹12 LPA in Bengaluru — the upgrade pays ₹18,720

Consider a software engineer in Bengaluru on the old regime: Basic salary: ₹50,000/month (₹6,00,000/year). HRA received: ₹30,000/month (₹3,60,000/year). Rent paid: ₹40,000/month (₹4,80,000/year). City status: Bengaluru is a 50% metro from FY 2026-27. The three legs: 1. Actual HRA: ₹3,60,000. 2. Rent minus 10% of salary: ₹4,80,000 − ₹60,000 = ₹4,20,000. 3. 50% of salary: ₹3,00,000. The exemption is the lowest — ₹3,00,000. Taxable HRA: ₹60,000. Now compare with the pre-2026 rule, when Bengaluru was at 40%: leg 3 would have been ₹2,40,000, making the exemption ₹2,40,000. The metro upgrade added ₹60,000 of tax-free HRA. For a ₹12-lakh earner sitting in the 30% slab, that ₹60,000 saves 31.2% (30% plus the 4% health and education cess) — ₹18,720 every year.

Worked Example 2: ₹8 LPA in Mumbai — full HRA, zero taxable

Now a marketing executive in Mumbai, also on the old regime: Basic salary: ₹35,000/month (₹4,20,000/year). HRA received: ₹17,500/month (₹2,10,000/year). Rent paid: ₹30,000/month (₹3,60,000/year). City status: Mumbai has always been a 50% metro. The three legs: 1. Actual HRA: ₹2,10,000. 2. Rent minus 10% of salary: ₹3,60,000 − ₹42,000 = ₹3,18,000. 3. 50% of salary: ₹2,10,000. The exemption is ₹2,10,000 — the entire HRA is tax-free, and taxable HRA is nil. At this income level the marginal slab is 20%, so the exemption saves 20.8% (20% plus 4% cess) — ₹43,680 a year that would otherwise be taxed. Under the new regime, by contrast, the whole ₹2,10,000 would be taxable salary, taxed at the new regime's 10% band — which is why renters with sizeable HRA so often come out ahead on the old regime, even after accounting for the new regime's lower slabs.

The documents your employer will ask for

Exemptions are claimed through your employer first (for monthly TDS) and reconciled in your return. Keep these ready: Rent receipts and a rental agreement — the standard proof, submitted monthly or at the employer's declaration window. Landlord's PAN if annual rent exceeds ₹1 lakh — roughly ₹8,334 a month. Above that line, the PAN is mandatory for the employer to allow the exemption while computing TDS. If your landlord genuinely has no PAN, tax guides advise getting a written declaration with their name, address and a statement that no PAN exists. Landlord relationship disclosure — the updated 2026 filing forms (reported as Form 124 in the new-rule guides, replacing the old Form 12BB) ask you to declare your relationship with the landlord. This is aimed squarely at rent paid to parents or relatives. Proof of payment — bank transfers are the cleanest trail. Cash rent with no transfer record is the weakest claim on scrutiny. One practical point: if you missed claiming HRA through your employer during the year, you can still claim it directly while filing your return, with the same documents in hand.

Old regime vs new regime: HRA is often the decider

The new regime's pitch is lower slab rates and the ₹75,000 standard deduction with almost no paperwork — and it is the default unless you actively opt out with your employer. But it gives you zero HRA exemption, zero 80C, zero 80D. The old regime keeps all of them but at higher slab rates. A useful rule of thumb from tax planners: salaried renters in metros with high rent outgo plus other deductions (80C investments, 80D premiums, home-loan interest) usually win on the old regime; people with minimal deductions or no rent usually win on the new. Because the new Income-tax Act, 2025 retains both regimes, this comparison has to be rerun every year — salary hikes, rent changes and new deductions move the answer. The income-tax calculator embedded above lets you model both side by side before you lock your regime choice with your employer.

Rent paid to parents or family: the genuine-arrangement rule

Paying rent to your parents is legal and the exemption is available — but only if the arrangement is genuine. The rent must actually be paid, preferably by bank transfer, and your parent must declare it as rental income in their own return. Fabricated receipts for a house you occupy without paying are exactly what the new landlord-relationship disclosure is designed to catch, and tax officers have disallowed such claims on scrutiny. If your parent is in a lower tax bracket than you, the family can come out ahead overall — but that is a family tax-planning call best made with a chartered accountant, not a DIY assumption.

Five mistakes that get HRA claims disallowed

1. Computing on gross salary instead of basic-plus-DA — the most common error; it overstates the exemption. 2. Claiming while living in your own house — HRA requires rent paid for occupied accommodation; homeowners cannot claim it (though they may claim 80GG up to ₹60,000 a year if they receive no HRA at all). 3. No landlord PAN above ₹1 lakh annual rent — the employer will simply disallow the exemption in TDS. 4. One annual calculation despite mid-year changes — salary revisions, job switches and rent changes each need their own period-wise computation. 5. Defaulting into the new regime with your employer — if you never opted for the old regime, your employer deducts TDS with your full HRA taxable. You can still pick the old regime at filing, but your monthly take-home already took the hit.

SOURCES: Financial Express (via Ashish Mehta, Partner, Khaitan & Co) on the 2026 metro-city HRA upgrade; CA Club India and multiple 2026 tax guides on the exemption formula and ₹1-lakh landlord-PAN rule; Income-tax department regime FAQ and ClearTax 115BAC summary on new-regime HRA non-availability; tax-guide reporting on the updated 2026 declaration forms.

DISCLAIMER (verbatim): This article is for educational purposes only and is not financial advice. Please consult a SEBI-registered investment adviser for personalized guidance. Investments are subject to market risk.