The Centre has suggested new income-tax rules that could change how House Rent Allowance (HRA) tax exemption works for salaried employees. These changes are part of the Draft Income-tax Rules, 2026, and may apply from April 1, 2026, if approved by Parliament.
The government is proposing to widen the scope of higher House Rent Allowance (HRA) tax exemption under the old income-tax regime by extending it to more cities, according to the draft Income-tax Rules, 2026. The move aims to align tax relief with rising rental costs in fast-growing urban centres and evolving employment patterns.
Currently, salaried employees living in Mumbai, Delhi, Kolkata and Chennai are eligible to claim HRA tax exemption of up to 50% of their salary, while those residing in other cities can claim exemption capped at 40%. Under the draft rules, Bengaluru, Hyderabad, Pune and Ahmedabad are proposed to be added to the 50% category, recognising their emergence as major employment hubs with significantly higher housing costs. Employees in all other locations will continue to be covered by the 40% limit.
What is HRA?
HRA (House Rent Allowance) is a part of a person’s salary given by an employer to help pay house rent. Under the old tax regime, some part of HRA is not taxed, which means people can save tax.
Important: HRA tax benefit is available only in the old tax regime, not in the new tax regime.
What is changing?
As per Rule 279 of the draft Income-tax Rules, 2026, the tax-exempt portion of HRA will be the lowest of three amounts: the actual HRA received, the rent paid minus 10% of salary, or 50% of salary for employees posted in the eight specified cities and 40% for others. For this purpose, salary includes basic pay and dearness allowance, where applicable, but excludes other allowances and perquisites. The exemption will apply only for the period during which the employee occupies the rented accommodation.
Current Rule (Before Change)
People living in Mumbai, Delhi, Kolkata, and Chennai can get HRA tax exemption up to 50% of their salary.
People living in all other cities can get exemption up to 40% of their salary.
Proposed New Rule (Draft Rules 2026)
The government plans to add more cities to the 50% category because rents have become very expensive there.
Cities proposed to get 50% HRA exemption:
- Mumbai
- Delhi
- Kolkata
- Chennai
- Bengaluru
- Hyderabad
- Pune
- Ahmedabad
For all other cities in India, the HRA exemption will remain 40% of salary.
How is HRA exemption calculated?
The tax-free HRA will be the lowest of these three amounts:
- The actual HRA you receive from your employer
- The rent paid minus 10% of salary
50% of salary (for the 8 big cities listed above)
OR
40% of salary (for all other cities)
What Does “Salary” Mean Here?
For HRA calculation:
- Salary = Basic pay + Dearness Allowance (if applicable)
- Other allowances and benefits are not included
Also, you get HRA exemption only for the months you actually lived in a rented house.
HRA Limits
| Where you live | HRA exemption limit |
| Mumbai, Delhi, Kolkata, Chennai, Bengaluru, Hyderabad, Pune, Ahmedabad | 50% of salary |
| Any other city | 40% of salary |
Why is the government doing this?
The government says this change reflects:
- Growth of new job hubs
- Rising house rents in large cities
- Need to update old tax rules to match today’s reality
- This idea was also discussed during Union Budget talks.
Other important changes
The draft rules also suggest increasing tax-free limits for some allowances:
- Children hostel allowance: From Rs 300 to Rs 9,000
- Interest-free loan limit: From Rs 20,000 to Rs 2,00,000
- Children education allowance (per month): From Rs 100 to Rs 3,000
- Transport allowance exemption: Up to 70% of allowance, capped at Rs 25,000 (earlier Rs 10,000)
What happens next?
- The draft rules are open for public feedback till February 22, 2026
- After review, the final rules will be sent to Parliament
- If approved, they will apply from April 1, 2026
