4 New Cities Just Got Added to the 50% HRA Exemption List — Is Your City Finally on It?

If you are a salaried professional living on rent in Bengaluru, Hyderabad, Pune, or Ahmedabad, this is quite possibly the most impactful tax update you have read all year. For over two decades, the 50% House Rent Allowance (HRA) exemption was an exclusive privilege enjoyed by residents of only four Indian cities — Delhi, Mumbai, Kolkata, and Chennai. Everyone else, regardless of how expensive their city had become or how much of their paycheck went toward rent, was capped at a 40% exemption. That imbalance has finally been corrected.

Under the Income Tax Rules 2026, notified by the Central Board of Direct Taxes (CBDT) on March 20, 2026, and effective from April 1, 2026, Bengaluru, Hyderabad, Pune, and Ahmedabad have officially been elevated to metro city status for HRA exemption purposes. This means residents of these four cities can now calculate their HRA exemption using 50% of their basic salary instead of 40% — a change that directly increases their take-home pay. This guide breaks down everything you need to know: what changed, why it matters, how to calculate your new benefit, and what steps you should take right now.

Why HRA Exemption Even Matters

Before diving into the specifics, it helps to understand why HRA tax exemption is worth paying close attention to in the first place. Under Section 10(13A) of the Income Tax Act, salaried employees who live in rented accommodation and receive HRA as part of their salary package are entitled to claim a partial exemption on that HRA. This exemption reduces your taxable income, which in turn reduces the income tax you owe — keeping more money in your own hands every single month.

The exemption is calculated as the least of three values:

• The actual HRA received from your employer
• Rent paid minus 10% of your salary (basic + eligible Dearness Allowance)
• 50% of salary (for metro cities) or 40% of salary (for non-metro cities)

The third condition is exactly where the new rule change applies. By raising the cap from 40% to 50% for four additional cities, the government has ensured that salaried employees in those cities have a larger ceiling for the third condition — which in many real-world salary structures directly increases the final exempt amount.

The 4 Cities That Just Made the List

The four cities newly added to the 50% HRA exemption category, effective April 1, 2026, are Bengaluru, Hyderabad, Pune, and Ahmedabad. Here is what you need to know about each one and why this change was long overdue:

Bengaluru has been the tech capital of India for decades. Its rental market, driven by a massive influx of IT professionals, is among the costliest in the country. A 2BHK apartment in areas like Koramangala, Indiranagar, or Whitefield can easily cost between ₹35,000 and ₹70,000 per month. Despite this, Bengaluru was classified as a non-metro city for tax purposes — an anomaly that tax professionals and employees alike had been flagging for years.

Hyderabad has transformed into a global IT and pharmaceutical hub. HITEC City, Gachibowli, and Kondapur have become some of the most sought-after residential addresses in India, with rentals to match. The city’s explosive infrastructure growth and population of skilled professionals made the 40% cap increasingly untenable.

Pune serves as a major automotive, IT, and education hub with a large population of young salaried professionals. Rental costs in Baner, Kharadi, Hinjewadi, and Viman Nagar have risen sharply over the last decade. Pune’s inclusion in the 50% category is a recognition of its economic stature and cost of living realities.

Ahmedabad, Gujarat’s commercial and industrial powerhouse, has seen consistent growth in its rental market alongside its expanding manufacturing, finance, and startup ecosystem. Its addition to the metro category ensures that employees in one of India’s fastest-growing economic corridors finally receive equitable tax treatment.

The Full Updated List of 50% HRA Cities

Here is the complete, updated list of cities now eligible for the 50% HRA exemption under the old tax regime from FY 2026-27 onwards:

Every city and town in India not named above continues to receive a 40% exemption cap.

How Much More Will You Actually Save?

This is the question that really matters. Let us walk through a concrete, real-world example to understand the financial impact. Consider a software engineer based in Bengaluru with the following salary structure:

• Basic Salary: ₹60,000/month
• HRA received: ₹30,000/month
• Actual rent paid: ₹28,000/month

Under the old rules (40% cap — non-metro):

• Actual HRA received: ₹30,000
• Rent paid minus 10% of basic: ₹28,000 – ₹6,000 = ₹22,000
• 40% of basic salary: ₹24,000
• Exempt HRA = Least of the three = ₹22,000/month

Under the new rules (50% cap — metro from April 1, 2026):

• Actual HRA received: ₹30,000
• Rent paid minus 10% of basic: ₹22,000 (same as above)
• 50% of basic salary: ₹30,000
• Exempt HRA = Least of the three = ₹22,000/month

In this particular case, the third condition still is not the limiting factor — the rent-based formula determines the exemption. But now consider the same employee with a higher salary and higher rent, a common scenario for senior professionals:

• Basic Salary: ₹1,20,000/month
• HRA received: ₹60,000/month
• Actual rent paid: ₹55,000/month

Under old 40% rule:

• Rent minus 10% of basic: ₹55,000 – ₹12,000 = ₹43,000
• 40% of basic: ₹48,000
• Actual HRA: ₹60,000
• Exempt amount = ₹43,000/month

Under new 50% rule:

• Rent minus 10% of basic: ₹43,000 (same)
• 50% of basic: ₹60,000
• Actual HRA: ₹60,000
• Exempt amount = ₹43,000/month

Still the same? Yes, because the rent formula is the binding constraint here. But for professionals who pay very high rents relative to their basic salary, the jump from 40% to 50% directly raises the third condition ceiling — resulting in a meaningful increase in the exempt amount and a tangible reduction in annual tax liability. The higher your basic salary and the more you pay in rent, the greater the benefit from this change.

The Old Tax Regime Condition You Cannot Ignore

There is one absolutely critical condition attached to this benefit that every salaried employee must understand: HRA exemption under Section 10(13A) is only available if you are under the old tax regime. If you have opted for the new tax regime — which offers lower slab rates but eliminates most deductions and exemptions — you cannot claim HRA exemption at all, regardless of which city you live in.

This makes the old vs. new tax regime decision particularly consequential for residents of the newly added cities. If you live in Bengaluru, Hyderabad, Pune, or Ahmedabad, pay significant rent, and have not yet assessed which regime is more beneficial for you, now is the right time to do that calculation carefully. For many mid-to-high income professionals in these cities who pay substantial rent, the old regime may now deliver greater after-tax income than before — making the comparison even more favorable.

Why Did This Change Take So Long?

The original classification of metro cities for HRA purposes dates back to the Income Tax Rules, 1962. At that time, Delhi, Mumbai, Kolkata, and Chennai were undisputedly the country’s dominant urban centers. The economic geography of India, however, has shifted dramatically over the last 30 years. Bengaluru overtook many traditional metros in terms of per capita income, cost of living, and real estate prices. Hyderabad, Pune, and Ahmedabad followed similar trajectories.

Tax professionals, chartered accountants, and employee advocacy groups had been pushing for this update for years. The argument was straightforward: if a city has rent levels comparable to or exceeding traditional metros, employees there should receive the same degree of tax relief on their HRA. The Income Tax Rules 2026, which replaced the long-standing Income Tax Rules 1962 and came into effect on April 1, 2026, finally addressed this. The CBDT’s notification on March 20, 2026, formalized what many had called a long-overdue correction to an outdated urban classification.

What This Means for Employers and HR Departments

If you manage payroll, HR operations, or compensation structuring for employees based in Bengaluru, Hyderabad, Pune, or Ahmedabad, you need to act on this change immediately if you have not already. From April 1, 2026 (Tax Year 2026-27), the TDS calculations for employees in these cities who are under the old tax regime must reflect the higher 50% HRA exemption ceiling.

Failure to update payroll software or exemption calculations could result in excess TDS being deducted from employees’ salaries — which, while refundable during ITR filing, creates unnecessary cash flow disruption for employees and increases the administrative burden at year end. Proactive HR and payroll teams should verify that their system configurations have been updated, communicate the change clearly to employees, and revisit CTC structuring conversations, particularly for new hires in these cities where offering competitive HRA components now carries a greater net-in-hand advantage.

What Should Salaried Employees Do Right Now?

If you live in one of the four newly added cities and pay rent, here is a clear, actionable checklist:

1. Confirm your tax regime choice — Determine whether you are under the old or new tax regime for FY 2026-27. Only the old regime allows HRA exemption.
2. Run a regime comparison — Use the updated 50% cap to recalculate your HRA exemption under the old regime and compare it against the simplified slabs of the new regime. The answer may have shifted in favor of the old regime if your rent is substantial.
3. Submit rent receipts and landlord PAN — If your annual rent exceeds ₹1 lakh, you are required to provide your landlord’s PAN to your employer for HRA exemption to be processed correctly.
4. Inform your employer’s payroll department — If your employer has not yet updated TDS calculations, flag this proactively with your HR or finance team and cite the Income Tax Rules 2026 notification dated March 20, 2026.
5. Review your rent agreement — Ensure your rent agreement is valid, current, and accurately reflects the rent amount you are claiming. Discrepancies between claimed rent and documented rent can attract scrutiny during assessments.
6. Consult a CA if your salary structure is complex — For those with mixed income sources, variable pay, or other deductions, a qualified Chartered Accountant can help you optimize the full picture.

The Bigger Picture: India’s Evolving Tax Framework

This HRA update is not happening in isolation. It is part of the broader Income Tax Rules 2026, which replaced the Income Tax Rules 1962 — a sweeping overhaul of India’s tax administration framework that operationalizes the Income Tax Act 2025. Beyond the HRA expansion, the new rules also update PAN quoting thresholds, revise exemption limits on various allowances, and introduce new income tax return forms.

For salaried employees, however, the HRA metro expansion is arguably the most immediately tangible change. Rent is one of the largest monthly expenses for a working professional, and any policy that reduces the tax burden on housing costs directly improves financial well-being. The fact that this change is now encoded in formally notified rules — not a proposal, not a draft, but live law effective April 1, 2026 — means there is no ambiguity about its applicability. Employees in Bengaluru, Hyderabad, Pune, and Ahmedabad who are under the old tax regime and pay rent should treat this as confirmed, claimable relief for FY 2026-27 and every financial year thereafter until the rules change again.

Final Word: Do Not Leave This Benefit on the Table

For over 60 years, millions of salaried professionals in some of India’s most expensive cities were left at a disadvantage purely because of an outdated urban classification. That era is over. The Income Tax Rules 2026 have finally aligned the tax framework with the economic realities of modern India, recognizing that the country’s urban growth story is not limited to four cities.

If your city — Bengaluru, Hyderabad, Pune, or Ahmedabad — is on the new list, make sure you are actually claiming what you are now legally entitled to. Review your payroll, verify your tax regime, organize your rent documentation, and if needed, talk to a tax professional. The benefit exists. It is official. And it will only help you if you act on it.

This article is intended for informational purposes only and reflects the provisions of the Income Tax Rules 2026, effective April 1, 2026. It does not constitute personalized tax advice. Please consult a qualified Chartered Accountant for guidance specific to your financial situation.