For more than two decades, only Delhi, Mumbai, Kolkata and Chennai counted as metro cities for house rent allowance. Everywhere else, including Bengaluru and Pune, was capped at the lower rate, even though rents there often matched the four metros. The Income-tax Rules, 2026 changed that.
What changed
From 1 April 2026, Bengaluru, Hyderabad, Pune and Ahmedabad joined the metro list for HRA purposes, taking the total to eight cities. Employees in those four cities can now use 50% of salary as the third limb of the HRA calculation, instead of 40%. Every other city stays at 40%.
The timing matters. The return you filed in July 2026 covered FY 2025-26, which was still under the old Act and the old four-city list. The new eight-city rule applies to salary earned from 1 April 2026, which you will report in the return filed in 2027.
How the exemption is calculated
The exempt part of your HRA is the lowest of three amounts. The first is the HRA your employer actually pays you. The second is the rent you pay for the year minus 10% of your salary. The third is 50% of salary in the eight metros, or 40% elsewhere. For this purpose, salary means basic pay plus dearness allowance, not your whole package.
Because the exemption is the lowest of the three, the higher city rate only helps when that third limb was the binding one. In practice, that means you need rent that is high relative to your basic pay. If your rent is modest, the second limb will still decide your exemption, and moving from 40% to 50% changes nothing.
An example from Bengaluru
Take someone in Bengaluru with basic pay of ₹10 lakh, HRA of ₹5 lakh and rent of ₹50,000 a month. The three limbs are ₹5 lakh of actual HRA, ₹5 lakh of rent less 10% of salary, and either ₹4 lakh at the old 40% rate or ₹5 lakh at the new 50% rate. Under the old rule the exemption was ₹4 lakh. From Tax Year 2026-27 it becomes ₹5 lakh, worth about ₹31,200 of tax at the 30% slab with cess.
Now take the same person paying ₹25,000 a month. The second limb gives ₹2 lakh, which is the lowest of the three either way, so the city change makes no difference at all.
The catch that matters most
HRA exemption is available only under the old tax regime. If you are on the new regime, none of this applies to you, whichever city you live in. Since the new regime suits most salaried people, the eight-city change is only useful to those whose total deductions are already large enough to justify staying on the old regime. Our guide on choosing between the regimes sets out that threshold.
Keep your paperwork clean
From 1 April 2026, the declaration you give your employer moves from Form 12BB to the new Form 124. It asks you to state your relationship with your landlord, which brings arrangements such as paying rent to a parent or spouse into plain view. Those are not automatically disallowed, but the rent needs to be genuine, supported by an agreement, and ideally paid by bank transfer. Where annual rent crosses ₹1 lakh, you still need to give the landlord's PAN.
Check your own numbers
Our CTC to in-hand salary calculator applies the eight-city list automatically and shows your HRA exemption alongside the rest of your old regime deductions, so you can see whether the higher limit makes any difference for you.
This is general information and not tax advice. Last updated 22 September 2026.