Last reviewed: 12 August 2026. House Rent Allowance is still the single biggest tax-free component in most salary structures - and 2026 has brought the first real change to the rules in years: from FY 2026-27, eight cities qualify for the higher 50% exemption limit, with Bengaluru, Hyderabad, Pune and Ahmedabad joining the original four metros. Here is exactly how the exemption works, what changed, and worked numbers you can check against your own payslip.
How the exemption is computed
The exemption under section 10(13A) of the Income-tax Act, 1961 read with Rule 2A (carried into section 11 of the Income-tax Act, 2025, read with its exemption schedule, from FY 2026-27) is the least of:
- Actual HRA received for the period the rented house is occupied;
- 50% of salary (metro) or 40% (non-metro);
- Rent paid minus 10% of salary.
"Salary" here means basic pay plus dearness allowance (if it forms part of retirement benefits) plus fixed-percentage commission on turnover - not gross CTC. The computation is done for the period of occupation, so a mid-year rent change or city change splits the calculation.
The 2026 metro change - who gains
| Period | Cities at 50% | Cities at 40% |
|---|---|---|
| Up to FY 2025-26 (AY 2026-27 - returns being filed now) | Delhi, Mumbai, Kolkata, Chennai | All other cities, including Bengaluru, Hyderabad, Pune, Ahmedabad |
| From FY 2026-27 (Income-tax Rules, 2026) | Delhi, Mumbai, Kolkata, Chennai, Bengaluru, Hyderabad, Pune, Ahmedabad | All other cities |
Do not apply the 8-city list to the return you are filing this season. AY 2026-27 follows the old 4-metro list; the expanded list applies to salary earned from 1 April 2026, so you will first see it in TDS workings for FY 2026-27 and in the AY 2027-28 return.
Worked example - Pune employee, before and after
Basic salary Rs 60,000/month (no DA), HRA Rs 30,000/month, rent paid Rs 35,000/month in Pune. Annual figures: salary Rs 7,20,000; HRA Rs 3,60,000; rent Rs 4,20,000.
| Limb | FY 2025-26 (Pune = 40%) | FY 2026-27 (Pune = 50%) |
|---|---|---|
| Actual HRA received | Rs 3,60,000 | Rs 3,60,000 |
| 50%/40% of salary | Rs 2,88,000 | Rs 3,60,000 |
| Rent minus 10% of salary | Rs 3,48,000 | Rs 3,48,000 |
| Exempt (least) | Rs 2,88,000 | Rs 3,48,000 |
The same employee gets Rs 60,000 more exempt from FY 2026-27 - roughly Rs 18,700 of tax at the 30% slab (old regime, excluding surcharge). If your salary structure is HRA-light, this is the year to revisit it with your employer.
HRA vs the new regime - run the break-even
HRA exemption exists only in the old regime. The new regime is the default and taxes HRA fully, but has lower slab rates. High rent in a metro is one of the few situations where the old regime still wins for many taxpayers - especially when combined with 80C, health insurance and home-loan interest. Run both computations before choosing; our old vs new regime break-even guide shows the method with worked examples.
Documentation that survives scrutiny
- Rent agreement + monthly receipts (revenue stamp where customary). Pay by bank transfer, not cash.
- Landlord PAN if annual rent exceeds Rs 1,00,000; a signed no-PAN declaration (Circular 8/2013) if the landlord has none.
- TDS on rent: individuals paying rent above Rs 50,000 per month must deduct TDS at 2% under section 194-IB (see our TDS section mapping under the 2025 Act).
- Rent to parents: genuine agreement, actual payment, and the parent offers the income in their return. Avoid spouse arrangements.
- Keep Form 12BB filed with your employer consistent with what you claim in the ITR - mismatches with Form 16 trigger queries; if you missed claiming HRA through the employer, it can still be claimed in the return with proofs on file. Also see house property income and home-loan benefits if you own property.
Common mistakes we see in filings
- Applying 50% for Bengaluru/Pune/Hyderabad/Ahmedabad in the AY 2026-27 return - it is still 40% for FY 2025-26.
- Computing on gross salary or CTC instead of basic + qualifying DA.
- Claiming HRA while living in one's own house, or paying "rent" only on paper.
- Forgetting 194-IB TDS on rent above Rs 50,000/month - interest and fees follow the tenant, not the landlord.
- Missing the ITR deadlines for AY 2026-27 and losing the chance to pick the old regime in a belated return (the option narrows once the due date passes).
Frequently asked questions
Can I claim HRA exemption under the new tax regime?
No. HRA exemption is available only under the old tax regime. Under the new (default) regime the entire HRA is taxable. If your HRA exemption plus other deductions exceed the new-regime benefit, evaluate opting for the old regime before filing.
Which cities count as metro for the 50% HRA limit?
For AY 2026-27 (FY 2025-26, being filed now) only Delhi, Mumbai, Kolkata and Chennai qualify at 50%. From FY 2026-27, under the Income-tax Rules, 2026, Bengaluru, Hyderabad, Pune and Ahmedabad are also treated as metros - eight cities in all. Everywhere else remains 40%.
Do I need my landlord's PAN?
Yes, if annual rent exceeds Rs 1,00,000. If the landlord has no PAN, obtain a signed declaration to that effect (Circular 8/2013). Without this, the employer must restrict the exemption while deducting TDS.
Can I pay rent to my parents and claim HRA?
Yes, if the arrangement is genuine: a rent agreement, actual bank payment every month, and the parent offering the rent as income in their return. Rent paid to a spouse is litigation-prone and best avoided. Disclose family-landlord arrangements accurately if the ITR utility asks.
Can I claim both HRA and home loan deductions?
Yes, where the facts support it - for example, you own a house in one city (claiming interest deduction) but live on rent in another city for work. Keep evidence of the genuine need for both.
What if my salary has no HRA component at all?
Salaried persons without HRA and the self-employed can use Section 80GG (old regime): the least of Rs 5,000 per month, 25% of adjusted total income, or rent paid minus 10% of income - subject to conditions including not owning a house at the place of work.
We prepare and review ITRs with defensible HRA workings, advise on old-vs-new regime selection, and handle rent-TDS compliance for tenants.
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This article is for general information for AY 2026-27 / FY 2026-27 and is not a substitute for professional advice on specific facts. Figures assume resident individual taxpayers; verify positions applicable to your case before acting.