House Rent Allowance (HRA) is one of the most widely used tax-saving benefits for salaried employees in India. The Draft Income Tax Rules 2026 propose two significant changes to HRA — an expansion of the 50% exemption to more cities and a new landlord relationship disclosure requirement. Here is everything you need to know before April 1, 2026.
HRA exemption is available ONLY under the Old Tax Regime. If you have opted for the New Tax Regime, HRA is not available regardless of how much rent you pay. This is one of the key reasons the Old Regime still makes sense for employees in high-rent cities.
The Big Change — 4 More Cities Added to the 50% Category
Currently, the HRA exemption is calculated using a 3-step formula where one component depends on whether you live in a "metro" city or not:
- Metro cities (50% of salary): Currently only Mumbai, Delhi, Kolkata and Chennai
- Non-metro cities (40% of salary): All other cities including Bengaluru, Hyderabad, Pune, Ahmedabad
Under the Draft Income Tax Rules 2026, Bengaluru, Hyderabad, Pune and Ahmedabad will be added to the 50% category — recognising their emergence as major employment hubs where rents are now comparable to the four original metros.
| Category | Current Cities | Proposed from April 2026 |
|---|---|---|
| 50% of Salary | Mumbai, Delhi, Kolkata, Chennai | + Bengaluru, Hyderabad, Pune, Ahmedabad |
| 40% of Salary | All other cities | All other cities (unchanged) |
How Much More Will You Save? — Real Example
Consider a salaried employee in Bengaluru with Basic + DA of ₹8 lakh per year, receiving HRA of ₹3.6 lakh per year and paying actual rent of ₹3 lakh per year.
HRA exemption is the lowest of three amounts:
- Actual HRA received = ₹3,60,000
- Rent paid minus 10% of salary = ₹3,00,000 - ₹80,000 = ₹2,20,000
- 40% of salary (current) = ₹3,20,000 | 50% of salary (proposed) = ₹4,00,000
| Current (40%) | Proposed (50%) | |
|---|---|---|
| HRA Exemption | ₹2,20,000 | ₹2,20,000 |
| Difference in this case | Same — because step 2 is the lowest | |
In this example the result is the same because step 2 (rent minus 10% of salary) is the binding constraint. The 50% category helps more when your actual rent is high relative to your salary and step 3 was previously the binding constraint. For employees paying very high rent in Bengaluru or Hyderabad with relatively lower basic pay, the difference can be ₹30,000–₹80,000 in additional exemption.
The HRA Formula — Explained Simply
1. Actual HRA received from employer
2. Actual rent paid minus 10% of (Basic + DA)
3. 50% of (Basic + DA) for metro cities — 40% for others
Salary here means Basic + DA only — not CTC or gross salary.
New Rule — Landlord Relationship Disclosure (Form 124)
This is the second significant change affecting HRA claimants. Under the Draft Income Tax Rules 2026, employees claiming HRA must now disclose their relationship with the landlord in Form 124 (the new investment declaration form replacing Form 12BB).
Why Is This Being Introduced?
The tax department has identified a common misuse pattern: employees paying "rent" to parents or relatives on paper only — without actual money changing hands — purely to claim HRA exemption. Under the current system, this was hard to detect at scale. With the new requirement, the IT department can use data analytics to cross-check:
- Whether the "landlord" (your parent, spouse or relative) is reporting rental income in their own ITR
- Whether money is actually moving via bank transfer or UPI (as opposed to cash)
- Whether the property ownership records match the declared landlord's name
The government is not removing HRA benefits — it is removing unverifiable claims. If your rent payment is real, documented and the landlord reports rental income, absolutely nothing changes for you. If your HRA claim exists only on paper, it will now be detected automatically through system matching.
Legitimate Rent to Parents — Still Allowed
Paying rent to parents and claiming HRA is legally valid provided the arrangement is genuine. To make sure it holds up:
- Always pay rent via bank transfer, UPI or cheque — never cash above ₹3,000/month
- Have a written rental agreement with a reasonable market-rate rent
- Ensure your parent declares the rental income in their ITR
- The property must legally belong to your parent — not you
- Disclose the relationship honestly in Form 124 when submitting to employer
HRA Documentation Checklist for FY 2026-27
| Document | Required For |
|---|---|
| Rent receipts (monthly) | All HRA claims |
| Rental agreement | All HRA claims (strongly recommended) |
| Landlord's PAN | Mandatory if rent exceeds ₹1 lakh/year |
| Landlord relationship declaration | New from April 2026 (Form 124) |
| Bank transfer records showing rent payments | Highly recommended |
| Landlord's ITR showing rental income | Required if claiming rent to relatives |
Should This Change Your Old vs New Regime Decision?
For employees in Bengaluru, Hyderabad, Pune and Ahmedabad who were previously on the border between Old and New Regime — this expansion to 50% may tip the scales in favour of the Old Regime. Combine higher HRA exemption with 80C deductions and home loan interest, and the Old Regime can save significantly more tax than before for these city residents.
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