HRA in FY 2026-27: Pune, Bengaluru, Hyderabad and Ahmedabad Are Metros Now — Who Actually Gains

Income Tax · HRA metro cities · Quick answer 30 sec · Full read 16 min

How the exemption is actually computed

Your exempt HRA is the lowest of three figures — and for most renters the binding one is the rent test, not the percentage cap that just changed.

For FY 2026-27 the exemption is granted by Schedule III (Table: Sl. No. 11) of the Income-tax Act, 2025. Note the form of that citation: HRA is no longer a section at all. Under the Income-tax Act, 1961 it sat at Section 10(13A); under the 2025 Act it is a Schedule entry. Most commentary online still says “Section 10(13A)” without naming a year or an Act, and for salary earned from 1 April 2026 that provision does not exist. If you are unclear which Act governs which year, start with our guide to the Income-tax Act, 2025 and the AY 2026-27 transition.

The three limits are:

One definition matters enormously and is constantly got wrong: “salary” here 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 decides whether the metro change is worth anything to you.

The test: is the cap actually binding for you?

Work out rent paid minus 10% of Basic plus DA. If that figure comfortably exceeds 40% of Basic plus DA, the cap was binding you and the reclassification is real money. If it is smaller, the change is worth nothing.

Three renters, all in Pune, all moving from a 40% cap to a 50% cap.

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.

The HRA metro cities list — and which city actually counts

The eight-city test turns on where your rented accommodation is, not where you are employed. Rule 279 is loosely drafted on this exact point, and the enabling provision settles it.

The eight cities qualifying for the 50% cap from FY 2026-27 are Delhi, Mumbai, Kolkata and Chennai, joined by Bengaluru, Pune, Hyderabad and Ahmedabad. Every other city remains at 40%.

Here is the wrinkle nobody covers. Rule 279(1)(c) says the higher rate applies to “an assessee employed in the location mentioned in column B” — while column B is itself headed “Location of residential accommodation”. Read literally, the operative words point at your workplace and the column heading points at your home.

The enabling provision resolves it. Schedule III, Table Sl. No. 11, condition (b) of the Income-tax Act, 2025 requires the prescribed extent to have regard to “the area or place in which such accommodation is situated”. So it is the location of the rented accommodation that governs. If you work in Mumbai but rent in Thane, or work in Gurugram but rent in Delhi, that distinction decides your cap — and it is worth documenting your rental address carefully rather than assuming your office city applies.

Only if you are on the Old Regime

Under the New Regime your entire HRA is taxable, whatever city you live in. Since the New Regime is the default, this reclassification reaches only those who actively opt out of it.

The disallowance is specific, and the section number depends on the year. For FY 2026-27 the New Regime denies the Schedule III Sl. No. 11 exemption under Section 202(2)(a)(i) of the Income-tax Act, 2025. For FY 2025-26 and earlier it was Section 10(13A) denied by Section 115BAC(2)(i) of the Income-tax Act, 1961. Different numbering, same outcome: no HRA exemption on the New Regime.

There is a more interesting implication. HRA is one of the largest deductions available to a renting professional and a major component of what makes the Old Regime competitive at all. A larger exemption raises your total deduction figure, which can move you across the break-even point. If you rent expensively in Pune or Bengaluru and were previously just short of that threshold, this is worth re-running — see our FY 2026-27 break-even analysis for the deduction totals you need to clear. And if you are weighing renting against buying, our guide to home-loan interest deductions covers the other side of that comparison — the Rs 2 lakh cap discussed above.

Two conditions that disqualify you outright

You get nothing if you own the accommodation, and nothing if no rent was actually incurred — both stated as conditions in the enabling provision itself.

Schedule III, Table Sl. No. 11 of the Income-tax Act, 2025 attaches conditions to the exemption. Two of them end the enquiry before the arithmetic starts:

• Condition (c) — ownership disqualifies. No exemption is available if the accommodation is owned by you. This catches a specific and not-uncommon case: someone who owns a flat in the same city but lives in rented accommodation elsewhere in it. The ownership test attaches to the accommodation you are claiming for, so read it carefully against your own facts.
• Condition (d) — rent must actually have been incurred. An exemption claimed where no rent was genuinely paid fails at the first condition, regardless of what receipts exist.

What Form 124 changes about documentation

Form 12BB has been replaced by Form 124, and the new form asks for your relationship with the landlord.

Alongside the city reclassification, the administrative side has tightened. Form 12BB — the investment and exemption declaration you give your employer — has been replaced by Form 124 from 1 April 2026. Tax-practitioner reporting places it under Section 392(5)(b) of the Income-tax Act, 2025 read with Rule 205 of the Income-tax Rules, 2026. Note that Rule 205 governs the form; the city table is Rule 279. They are frequently conflated.

If you are filing your own return rather than relying on your employer’s computation, our step-by-step ITR filing guide for salaried filers covers where the exemption is reported.

The substantive change for HRA claimants is a requirement to disclose your relationship with the landlord. Alongside the existing requirement to give 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 genuine. But the standard of proof has risen:

One obligation catches high-rent tenants regularly: where monthly rent exceeds Rs 50,000, you as the tenant must deduct TDS and deposit it. This sits at Section 194-IB of the Income-tax Act, 1961. Under the Income-tax Act, 2025 the TDS provisions are consolidated at Section 393 and its tables, and we have not verified the specific table entry that carries the tenant obligation — so confirm the current provision before relying on a section number. The obligation itself is real, it is separate from anything your employer does with your HRA declaration, and it is yours rather than your landlord’s.