The government has notified the Income Tax Rules, 2026, bringing important changes to House Rent Allowance (HRA). The update expands tax benefits to more cities and introduces stricter compliance rules—impacting how salaried employees claim HRA from April 1, 2026.
More Cities Now Eligible for Higher HRA Exemption
One of the biggest changes is the expansion of cities eligible for higher HRA tax exemption.
Earlier, only four metro cities qualified:
- Delhi
- Mumbai
- Kolkata
- Chennai
Now, the list has been expanded to include:
- Bengaluru
- Hyderabad
- Pune
- Ahmedabad
This means salaried employees in these cities can now claim higher tax deductions on rent, significantly improving tax savings.
HRA Exemption Limit Increased to 50%
With this update:
- Employees in these 8 cities can claim up to 50% of salary as HRA exemption
- Earlier, the newly added cities were treated as non-metros with only 40% exemption limit
This is a major benefit, especially for people living in high-rent cities like Bengaluru or Pune, where rental costs are already comparable to metros.
Important Rule: Disclosure of Landlord Relationship
Along with higher benefits, the government has also tightened compliance.
A new requirement has been introduced:
- Taxpayers must disclose their relationship with the landlord
- This applies especially when rent is paid to family members (parents, relatives, etc.)
- A new reporting format (like Form 124) has been introduced for this purpose
This step aims to prevent misuse of HRA claims and ensure transparency.
HRA Still Available Only Under Old Tax Regime
It is important to note:
- HRA exemption is available only under the old tax regime
- Under the new tax regime, no HRA benefit can be claimed
So, salaried employees may need to reassess whether the old regime is more beneficial after these changes.
Why This Change Matters
The expansion reflects a practical shift in India’s urban economy:
- Cities like Bengaluru, Pune, and Hyderabad now have metro-level rental costs
- Earlier tax rules did not reflect this reality
- The new rules bring tax policy in line with actual living costs
Impact on Salaried Employees
For employees in the newly added cities, this means:
- Higher tax savings
- Lower taxable income
- Potential increase in take-home salary
However, stricter documentation means:
- Proper rent receipts and disclosures are now essential
- Any mismatch or non-disclosure could lead to scrutiny
Bigger Picture: More Benefits, But With Accountability
The Income Tax Rules, 2026 follow a clear pattern:
- Expand benefits (higher HRA limits)
- Increase compliance (stricter disclosures)
This ensures that genuine taxpayers benefit, while misuse is minimized.
