Government Plans Wider HRA Tax Relief, More Cities May Qualify for 50% Exemption
New Delhi/Pune, 9th February 2026: The Centre is considering a significant revision to House Rent Allowance (HRA) tax benefits that could ease the financial burden on salaried individuals living in high-rent urban centres. The proposal aims to extend the higher HRA exemption limit — currently restricted to four metropolitan cities — to several fast-growing urban hubs.
At present, only residents of Mumbai, Delhi, Kolkata and Chennai can claim an HRA exemption of up to 50% of their salary under the old income tax regime. Taxpayers in all other cities are limited to a 40% cap.
Under a proposal being reviewed by policymakers, cities witnessing rapid economic and population growth — namely Bengaluru, Hyderabad, Pune and Ahmedabad — may be granted metro-equivalent status for HRA purposes. This would allow employees in these cities to claim the higher 50% exemption.
If cleared, the revised structure would be:
-50% of salary eligible for HRA exemption in: Mumbai, Delhi, Kolkata, Chennai, Bengaluru, Hyderabad, Pune and Ahmedabad
-40% of salary eligible for HRA exemption in all other cities
Officials indicate that the move is intended to bring tax policy in line with India’s evolving urban landscape. Over the last decade, several non-traditional metros have transformed into major economic engines, drawing large workforces in technology, services, manufacturing and startups. The resulting housing demand has significantly pushed up rental costs in these cities.
A senior official familiar with the discussions noted that rental trends in cities such as Bengaluru, Pune and Hyderabad now mirror those of traditional metros, warranting a reassessment of existing tax classifications.
Why the HRA Exemption Is Crucial?
For taxpayers who continue under the old tax regime, HRA remains one of the most important deductions available. The exemption reduces taxable income by factoring in rent paid, subject to defined limits and salary components.
This benefit has gained greater relevance because the alternative tax regime, introduced with lower slab rates, does not allow most deductions, including HRA. As a result, many salaried employees who pay substantial rent still prefer the old system to maximise tax savings.
Tax experts believe that extending the 50% exemption ceiling could offer noticeable financial relief in cities where rental values have surged alongside job creation and urban migration.
While the proposal has reportedly received encouraging feedback within policy circles, it has not yet been formally notified. Any change will come into effect only after an official announcement from the Finance Ministry or the Central Board of Direct Taxes.
If implemented, the revision would mark a major shift in urban tax policy and broaden the scope of relief for India’s expanding population of city-based renters.
