HRA in FY 2026-27: Pune, Bengaluru, Hyderabad and Ahmedabad Are Metros Now — Who Actually Gains
From FY 2026-27, four more cities — Bengaluru, Pune, Hyderabad and Ahmedabad — join Delhi, Mumbai, Kolkata and Chennai in qualifying for the 50% HRA cap instead of 40%. That sounds like a straightforward win, and for some people it is worth Rs 30,000 or more a year in tax. For many others it is worth exactly nothing. The reason is that your HRA exemption is the lowest of three figures, and raising the cap only helps if that cap was the figure holding you back. If your exemption was already limited by the “rent minus 10% of salary” test — which is what happens when your rent is modest relative to your salary — nothing changes for you. One test below tells you which group you are in. And none of it applies at all unless you are on the Old Regime.
up from 4
where the cap was binding, 30% slab
was already binding
If you rent in Pune, Bengaluru, Hyderabad or Ahmedabad, you have probably seen the headline: your city is a metro now, so your HRA exemption goes up. Before you adjust anything, it is worth understanding how the exemption is actually computed — because the change benefits a specific subset of renters and leaves everyone else exactly where they were.
How HRA Exemption Actually Works
Under Section 10(13A), your exempt HRA is the lowest of these three figures:
One definition matters enormously here and is constantly got wrong: “salary” in this formula means Basic plus Dearness Allowance plus commission calculated as a fixed percentage of turnover. It is not your CTC, and it is not your gross salary. People who use gross salary arrive at a much larger number and are then surprised when their employer or the department computes something smaller.
Because the answer is the lowest of the three, the practical question is always: which one is binding? That single question determines whether the metro change is worth anything to you.
The Test: Is the Cap Actually Binding for You?
Here are three renters, all in Pune, all moving from a 40% cap to a 50% cap.
| Renter | Salary (Basic+DA) / HRA received / Rent | Exempt at 40% | Exempt at 50% | Annual tax saved |
|---|---|---|---|---|
| A — modest rent | Rs 10,00,000 / Rs 5,00,000 / Rs 30,000 a month | Rs 2,60,000 | Rs 2,60,000 | Nil |
| B — high rent | Rs 10,00,000 / Rs 5,00,000 / Rs 60,000 a month | Rs 4,00,000 | Rs 5,00,000 | About Rs 31,200 |
| C — very high rent | Rs 12,00,000 / Rs 6,00,000 / Rs 80,000 a month | Rs 4,80,000 | Rs 6,00,000 | About Rs 37,440 |
Renter A gets nothing. Her rent of Rs 3.6 lakh a year minus 10% of salary gives Rs 2.6 lakh, which is below both the 40% cap of Rs 4 lakh and the 50% cap of Rs 5 lakh. The rent test was binding before and it is still binding after. Raising a cap she never reached changes nothing.
Renter B gains a full Rs 1 lakh of additional exemption, worth about Rs 31,200 in tax at a 30% slab. For her, the 40% cap was the binding limit — her rent test allowed Rs 6.2 lakh but the cap held her to Rs 4 lakh. Lifting the cap to Rs 5 lakh releases exactly Rs 1 lakh.
So the test is simple. Work out your rent paid minus 10% of your Basic plus DA. If that figure is comfortably larger than 40% of your Basic plus DA, the cap was binding you and the reclassification is real money. If it is smaller, the change does nothing for you at all.
Only If You Are on the Old Regime
The reclassification matters more than the arithmetic suggests, because HRA is now the thing that decides which regime you are on. That is the shift I see around me: the regime question has stopped being an income question and become a housing question. The dividing line is no longer what you earn. It is whether you rent expensively in a metro, service a large home loan, or neither. Someone earning Rs 20 lakh with a Rs 60 lakh loan and Rs 40,000 of monthly rent during construction can plausibly clear the break-even and belongs on the Old Regime. Someone earning the same Rs 20 lakh in an owned, unencumbered home has no realistic path there and belongs on the New. Same income, opposite answer — and HRA is usually the single largest reason for the difference.
Which is why the four new cities are a bigger event than a line in a table. Bengaluru, Pune, Hyderabad and Ahmedabad joining the 50 per cent list, notified under the Income-tax Rules, 2026 and applying to salary earned on or after 1 April 2026, strengthens the Old Regime case for renters in exactly the cities where the salaried base has grown fastest. Pulling the other way, the Section 24(b) deduction has been stuck at Rs 2 lakh while ticket sizes have risen sharply, so the buyer who took a loan this year exhausts it in the first year and gets no recognition for the rest of the interest. The Old Regime’s housing advantage is therefore strongest for renters and for people several years into a loan, and weakest for the first-time buyer carrying the largest housing cost of their life.
The practical consequence is that this is not a decision you make once. Your housing situation changes — you buy, you finish construction, you prepay, you move cities — and the regime that suited you last year may not suit you this year. Re-run it annually, and re-run it in the year you move.
This is the qualifier that removes most people from the conversation entirely. The HRA exemption exists only under the Old Regime. Under the New Regime, your entire HRA is taxable, regardless of what city you live in or how much rent you pay.
And the New Regime is the default. So the metro reclassification is relevant only to those who actively opt for the Old Regime — a shrinking group. If you are on the New Regime, this change is news you can safely ignore.
There is a more interesting implication though. HRA is one of the largest deductions available to a renting professional, and it is a major component of what makes the Old Regime competitive at all. A larger HRA exemption raises your total deduction figure, which can move you across the break-even point where the Old Regime starts beating the New one. If you are in Pune or Bengaluru with high rent and were previously just short of that threshold, this change is worth re-running the comparison — see our FY 2026-27 break-even analysis for the exact deduction totals you need to clear.
What Form 124 Changes About Documentation
Alongside the city reclassification, the administrative side has tightened. Reports of the new Income Tax Rules indicate that Form 12BB — the investment and exemption declaration you give your employer — has been replaced by Form 124 from 1 April 2026, issued under the Income Tax Act 2025 framework.
The substantive change for HRA claimants is a new requirement to disclose your relationship with the landlord. Alongside the existing requirement to provide the landlord’s PAN where annual rent exceeds Rs 1 lakh, this is aimed squarely at arrangements that exist only on paper.
Claiming HRA on rent paid to a parent remains entirely legal, and for many families it is a genuine arrangement. But the standard of proof has risen. If you are doing this, the arrangement needs to look like what it claims to be:
Bank transfer, UPI, or cheque — not cash. A traceable monthly payment is the single strongest piece of evidence that the arrangement is real.
Receipts alone are increasingly treated as insufficient on their own.
The same amount you claim must appear as income from house property in their return. A claim on one side with no corresponding income on the other is the mismatch that gets noticed.
The form now asks. Understating it is a straightforward misstatement rather than an aggressive interpretation.
One obligation catches high-rent tenants regularly: if your monthly rent exceeds Rs 50,000, you as the tenant are required to deduct TDS under Section 194-IB and deposit it. This is separate from anything your employer does with your HRA declaration, and it is your responsibility, not your landlord’s.
- From FY 2026-27, Bengaluru, Pune, Hyderabad and Ahmedabad join the four original metros at the 50% HRA cap. This applies to salary from 1 April 2026, not to the FY 2025-26 return.
- HRA exemption is the lowest of three figures: actual HRA received; 50% or 40% of salary; and rent paid minus 10% of salary. Salary means Basic plus DA, not CTC.
- The metro change only helps if the percentage cap was your binding limit. Where the rent-minus-10% test was already binding, the benefit is nil.
- Illustratively, a Pune renter paying Rs 60,000 a month on Rs 10 lakh Basic plus DA gains Rs 1 lakh of exemption, worth about Rs 31,200 at a 30% slab. A renter paying Rs 30,000 a month on the same salary gains nothing.
- None of this applies under the New Regime, where HRA is fully taxable. It matters only to Old Regime filers.
- Form 124 replaces Form 12BB from 1 April 2026 and adds mandatory landlord-relationship disclosure. Landlord PAN is required where annual rent exceeds Rs 1 lakh; TDS under Section 194-IB applies where monthly rent exceeds Rs 50,000.
Frequently Asked Questions
- Income Tax Department — Section 10(13A) HRA exemption provisions and Form declarations: incometax.gov.in
- Metro city reclassification to eight cities for the 50% cap from FY 2026-27, as reported by TaxGuru, “HRA Exemption: 8 Cities Now Qualify for 50% Exemption”: taxguru.in
- Government notification of the new Income Tax Rules 2026 for stricter compliance, Akashvani / News on AIR, March 2026: newsonair.gov.in
- Form 124 replacing Form 12BB from 1 April 2026, stated to be under Section 392(5)(b) of the Income-tax Act 2025 read with Rule 205 of the Income Tax Rules 2026, per tax-practitioner reporting.
- Section 194-IB — TDS obligation on tenants where monthly rent exceeds Rs 50,000.
- Worked examples computed by FinEstate on the Section 10(13A) three-limit formula and independently re-verified.
Four cities moving to the 50% HRA cap is a real benefit, but a narrower one than the headlines suggest. Because the exemption is the lowest of three figures, the higher cap only reaches you if the cap was what was holding you back. High rent relative to Basic plus DA means real money — roughly Rs 31,000 a year in our worked example. Modest rent means the change is worth nothing, because a different limit was binding all along.
Do the one calculation that settles it: rent paid minus 10% of Basic plus DA, compared against 40% of Basic plus DA. And remember the two conditions that override everything — it applies only from FY 2026-27, and only if you are on the Old Regime. If you are on the New Regime, your HRA is taxable no matter which city you live in.
Get FinEstate updates on tax rules, EPF, and RBI policy straight to your inbox.
Subscribe free
Comments
Post a Comment