House Rent Allowance (HRA) is one of the most valuable tax benefits available to salaried employees under the Old Tax Regime. For millions of people renting in India's cities, it can reduce tax by ₹30,000 to ₹1,20,000 per year depending on salary and rent.
The Draft Income Tax Rules 2026 — part of the new Income Tax Act 2025 framework effective April 1, 2026 — bring significant changes to how HRA works. Here is everything you need to know.
HRA exemption is not available under the New Tax Regime. If you are claiming HRA, you are already in the Old Regime. The changes below affect only Old Regime taxpayers. If you are in the New Regime, HRA is not relevant for your tax calculation.
Big Change 1 — Four New Cities Added to 50% HRA Bracket
Currently, only four cities — Mumbai, Delhi, Kolkata and Chennai — qualify for the higher HRA exemption of 50% of salary. All other cities are capped at 40% of salary. This rule was set decades ago and had not been updated despite the dramatic growth of several other cities.
Under the Draft Income Tax Rules 2026 (Rule 279), four new cities are proposed to be added to the 50% bracket:
| City | Current HRA Limit | Proposed Limit from April 2026 |
|---|---|---|
| Mumbai | 50% | 50% (unchanged) |
| Delhi | 50% | 50% (unchanged) |
| Kolkata | 50% | 50% (unchanged) |
| Chennai | 50% | 50% (unchanged) |
| Bengaluru | 40% | 50% (proposed) |
| Hyderabad | 40% | 50% (proposed) |
| Pune | 40% | 50% (proposed) |
| Ahmedabad | 40% | 50% (proposed) |
| All other cities | 40% | 40% (unchanged) |
How Much Can This Save You?
For an IT professional in Bengaluru with a basic salary of ₹80,000/month paying ₹25,000/month in rent:
| Old Rule (40%) | New Rule (50%) | |
|---|---|---|
| HRA Received (monthly) | ₹32,000 | ₹32,000 |
| Rent Paid minus 10% of Salary | ₹17,000 | ₹17,000 |
| % of Salary Cap | ₹32,000 (40%) | ₹40,000 (50%) |
| HRA Exemption (lowest of three) | ₹17,000 | ₹17,000 |
In this example, the rent paid is the binding constraint — so the city change makes no difference. But for employees with higher rent-to-salary ratios, the 50% cap becoming binding can mean additional exemption of ₹5,000 to ₹15,000 per month, saving ₹15,000 to ₹46,800 annually in tax.
How HRA Exemption Is Calculated — The Three-Step Formula
HRA exemption (Rule 279 under new rules) is always the lowest of these three amounts:
- Actual HRA received from employer
- Rent paid minus 10% of (Basic + DA)
- 50% of (Basic + DA) for the 8 specified cities, or 40% for all other cities
This formula is unchanged under the new rules. Only the list of cities eligible for the 50% cap has been expanded.
Big Change 2 — New Disclosure for Rent Paid to Family Members
This is the most significant compliance change in the new HRA rules. Under the new Form 124 (which replaces Form 12BB for investment declarations), if your total rent paid to a landlord exceeds ₹1 lakh per year, you must now disclose:
- Your relationship with the landlord — is it your parent, spouse, sibling or other relative?
- Landlord's PAN (this was already required above ₹1 lakh)
- Property ownership confirmation — proof that the relative actually owns the property
- Payment mode — cash payments will be scrutinised; bank transfers are strongly recommended
The new system will automatically cross-check your HRA claim against your landlord-relative's ITR. If your mother shows no rental income but you are claiming ₹24,000/month in HRA for rent paid to her, this mismatch will be flagged instantly — without any manual scrutiny. The department will send an automated notice to both taxpayers.
What If My Rent to Parents Is Genuine?
Genuine rent arrangements with family members remain fully permissible and continue to qualify for HRA exemption. You simply need to ensure:
- Your parent or relative actually owns the property (have the property documents ready)
- Rent is paid via bank transfer, UPI or cheque — not cash
- Your landlord-relative declares the rental income in their ITR each year
- You maintain rent receipts and the rental agreement
If all of the above are in place, the new disclosure requirement is just a paperwork formality — your HRA claim is safe.
What Should You Do Before April 2026?
- If you live in Bengaluru, Hyderabad, Pune or Ahmedabad — recalculate your HRA with the 50% cap (subject to rule finalisation) and check if it increases your exemption
- If you pay rent to parents — ensure they are filing ITR and declaring rental income. Start making all payments via bank transfer immediately
- Everyone claiming HRA — maintain rent receipts, rental agreement and landlord PAN details. You will need to submit these in Form 124 from April 2026
- Compare regimes again — if you are in Bengaluru or Hyderabad, the higher HRA exemption may make the Old Regime more attractive than before
🧾 Check If Old Regime Still Saves You More Tax
With new HRA city limits, Old Regime may save more for Bengaluru and Hyderabad employees. Calculate with your actual HRA and deductions on TurboX.
Calculate HRA Tax Saving →Is HRA Worth It Under Old Regime vs New Regime?
With the expanded HRA benefits and revised allowances under the draft rules, the Old Regime becomes more attractive again for salaried employees who have significant rent, 80C investments and health insurance. The government's decision to update these allowances — some unchanged for 30 years — signals that the Old Regime is not being phased out anytime soon.
For an employee in Bengaluru earning ₹15 lakh with ₹3 lakh in rent annually, ₹1.5 lakh in 80C and ₹25,000 in 80D, the Old Regime with the new 50% HRA cap could save ₹60,000 to ₹90,000 more per year than the New Regime. Use our tax calculator to find your exact number.