What Changed for HRA in FY 2026-27?
The Finance Act 2026 (effective April 1, 2026) expanded the list of metro cities for HRA purposes under Section 10(13A). Bengaluru, Pune, Hyderabad, and Ahmedabad now qualify for the 50% of Basic+DA rate — previously they were calculated at 40% like all other non-metro cities. This is the most significant HRA rule change in over three decades.
Until March 31, 2026, India's metro cities for HRA purposes were limited to Delhi, Mumbai, Kolkata, and Chennai — the four cities defined under the original Income Tax rules that have remained unchanged since 1961. The 40% rule applied to every other city, including Bengaluru and Hyderabad — India's two largest IT hubs by employee count.
This was a significant anomaly. A software engineer paying ₹30,000 rent in Bengaluru — where rental costs are comparable to Delhi — was getting 20% less HRA exemption than a counterpart in Delhi doing the identical job. The Finance Act 2026 corrected this by recognising the economic reality of housing costs in India's fastest-growing cities.
Impact for employees: If you are in Bengaluru, Pune, Hyderabad, or Ahmedabad and Condition 3 (the metro/non-metro percentage) was the binding constraint in your HRA calculation, your annual exemption increases immediately. For a ₹80,000 basic salary employee, this means Condition 3 jumps from ₹32,000/month to ₹40,000/month — potentially saving ₹28,800+ in additional taxes per year at the 30% slab.
Important action: Verify that your employer's payroll system has been updated to reflect the 50% rate for your city. Many payroll software systems update automatically, but some smaller companies or manual payroll setups may not have made the change yet. If your payslip still shows 40% for Bengaluru/Pune/Hyderabad/Ahmedabad, raise it with your HR or payroll team immediately. The excess TDS deducted can be reclaimed in your ITR filing.
The New 8 Metro Cities for HRA — Complete List FY 2026-27
| City | FY 2025-26 Rate | FY 2026-27 Rate | Change |
|---|---|---|---|
| Delhi / Mumbai / Kolkata / Chennai | 50% | 50% | No change |
| Bengaluru | 40% | 50% | +10% ✅ |
| Pune | 40% | 50% | +10% ✅ |
| Hyderabad | 40% | 50% | +10% ✅ |
| Ahmedabad | 40% | 50% | +10% ✅ |
| All other cities | 40% | 40% | No change |
Our free HRA calculator is already updated with all 8 metro cities for FY 2026-27. Select your city type and get your exact exemption in seconds.
The HRA Exemption Formula — Section 10(13A) and Rule 2A
HRA exemption in India is governed by Section 10(13A) of the Income Tax Act, 1961, read with Rule 2A of the Income Tax Rules, 1962. Together they define exactly how the tax-exempt portion of HRA is computed.
The formula requires you to compute three separate monetary values and then identify the minimum. That minimum — whichever is lowest — is your tax-exempt HRA. The rest is added to your taxable income and taxed at your applicable slab rate.
Why "minimum"? The three-condition rule ensures the exemption is proportional to three independent factors simultaneously. You can't over-claim based on just one factor. If you're paying very little rent (Condition 2 drags the exemption down), the fact that your employer pays large HRA doesn't help. All three conditions constrain the exemption from three different angles.
What counts as "Basic+DA"? The formula uses Basic Salary plus Dearness Allowance — not your total salary. Special allowances, HRA itself, LTA, and other components are excluded from the base. For most private sector employees, DA is zero, so only Basic Salary is used. Government employees typically have significant DA components that substantially increase their HRA base.
The 3 Conditions Explained Simply
Condition 1 — Actual HRA from Your Employer
The most straightforward condition. It's simply whatever HRA your employer pays you each month, as shown in your CTC breakdown or payslip.
This caps the exemption at what was actually paid. You can't claim exemption on HRA you didn't receive. If your employer pays ₹15,000 HRA but you pay ₹25,000 rent, you cannot claim exemption above ₹15,000 from this condition alone.
Condition 2 — Rent Paid Minus 10% of Salary
This is where most people lose exemption without realising it. Take your actual monthly rent, then subtract 10% of your Basic+DA. The remainder is Condition 2.
The 10% threshold acts as a self-contribution floor — the government's assumption that you can afford to pay 10% of your salary toward housing from your own pocket. Only rent above this threshold qualifies for exemption. If rent is below 10% of salary, this condition is ₹0, and your entire HRA becomes taxable.
Condition 3 — 50% or 40% of Basic+DA
This condition applies a percentage cap based on where you live. Metro city employees get 50%, non-metro get 40%. This is the condition most directly affected by the FY 2026-27 metro expansion.
The percentage cap acknowledges that housing costs vary by city. Higher costs in metros justify a higher exemption cap. For employees with high basic salaries and relatively low rent, this is often the binding condition — and the one where the metro reclassification makes the biggest difference.
Step-by-Step HRA Calculation Examples
Example 1 — Bengaluru IT Employee (Benefits from New Metro Rule)
Example 2 — Chennai Employee Where Condition 3 Binds
Our HRA exemption calculator shows all 3 conditions, highlights the binding one, and gives you the ideal rent figure automatically.
What Is the Ideal Rent to Maximise HRA Exemption?
Most HRA guides stop at showing you the exemption for your current rent. The more useful question is: what rent should you be paying to get maximum exemption?
The binding constraint in most cases is Condition 2 — rent paid minus 10% of salary. To make this condition equal to (or exceed) the minimum of Conditions 1 and 3, your rent needs to be at least:
C1 = ₹20,000 | C3 = ₹30,000 | MIN(C1,C3) = ₹20,000
Ideal Rent = ₹20,000 + ₹6,000 = ₹26,000/month
Paying more than the ideal rent does not increase your exemption further — it simply increases your actual outflow without additional tax benefit. Paying below the ideal rent means you're leaving exemption on the table.
This is particularly relevant for employees who have recently received salary hikes and haven't renegotiated their rent — or who are paying below-market rent (e.g., to family members) to minimise household expenses without realising it reduces their HRA benefit.
Our HRA calculator automatically computes and displays the ideal rent as Section D of the results — a feature most other calculators don't provide.
HRA Under the New Tax Regime — The Bad News
If you have opted for the new tax regime under Section 115BAC, your entire HRA is taxable. Section 10(13A) exemption is explicitly excluded from the new regime. The new regime offers lower slab rates in exchange for forgoing this and most other deductions.
This is one of the most critical inputs when choosing between old and new regime. For an employee paying ₹20,000/month rent in Bengaluru with ₹18,000 HRA received and ₹60,000 basic, the annual HRA exemption under the old regime could be ₹1.44–2.16 lakh. The tax saving at 30% slab is ₹43,000–65,000 per year — often larger than the benefit from the new regime's lower slab rates.
The general rule of thumb: if your total deductions (HRA + 80C + 80D + home loan interest) exceed ₹3.5–4 lakh per year, the old regime is likely better. HRA alone frequently contributes ₹1.5–2 lakh+ of this for metro city employees.
Note that the new regime remains the default from FY 2024-25 onwards. If you don't actively declare your regime preference to your employer, TDS is computed under the new regime — which means no HRA exemption is applied. Always declare your regime preference early in the financial year.
Common HRA Mistakes That Cost You Money
✗ Not updating city type after relocating to a new metro
If you moved to Bengaluru, Pune, Hyderabad, or Ahmedabad from FY 2026-27 but your employer still has you listed as non-metro (40%), you're losing 10% of Basic+DA in exemption every month. Submit a written request to HR with proof of your current city of residence.
Write to HR/payroll before April itself. Excess TDS can be reclaimed via ITR.
✗ Paying rent below 10% of basic salary and expecting exemption
If your rent is less than 10% of your Basic+DA, Condition 2 is zero or negative. Since the formula takes the minimum, your entire HRA exemption becomes zero. Thousands of employees paying ₹5,000–7,000 rent on ₹60,000+ basic wonder why they get no HRA benefit.
Either increase your rent to at least 10% of Basic+DA, or accept that HRA offers no tax benefit at current rent levels.
✗ Paying rent in cash above ₹5,000/month
While there's no absolute legal bar on cash rent payments, income tax officers during assessment frequently question large cash rent payments. If annual rent exceeds ₹1 lakh, PAN is mandatory regardless of payment mode. Bank transfers create a verifiable audit trail.
Pay rent via bank transfer (NEFT/UPI/IMPS). Keep screenshots of transfer confirmation.
✗ Not collecting PAN when annual rent exceeds ₹1,00,000
If annual rent > ₹1 lakh (i.e., more than ~₹8,334/month), providing the landlord's PAN to your employer is mandatory under Rule 26C. Without PAN, your employer may disallow the HRA exemption entirely for TDS purposes. You'd then need to claim it yourself in your ITR.
Collect landlord PAN card copy before submitting rent proof to your employer.
✗ Claiming HRA without actually paying rent
This is tax fraud. Submitting fake rent receipts or fictitious rent agreements to claim HRA exemption you're not entitled to is a criminal offence under the Income Tax Act. Tax officers cross-check HRA claims, and landlords' rental income is verified. The penalties include back taxes, interest, and penalty up to 300% of tax evaded.
Only claim exemption for rent you genuinely pay, with documentary proof.
HRA Exemption and Professional Tax — Understanding Both Together
HRA exemption and Professional Tax are two of the most important salary-related deductions for Indian employees — and they interact in ways most people don't think about.
Professional Tax reduces your taxable income first. Under Section 16(iii) of the Income Tax Act, Professional Tax paid during the year is fully deductible from your gross salary before any other deductions. This deduction is available under both old and new tax regimes. For most employees in states like Karnataka, Maharashtra, or Tamil Nadu, PT ranges from ₹1,800 to ₹2,500 annually.
The combined effect: If you are in Karnataka (PT: ₹2,400/year) claiming HRA exemption of ₹1,80,000/year under the old regime, your gross salary is reduced by ₹1,82,400 before income tax slabs are applied. At the 30% slab, that's a tax saving of approximately ₹54,720 — purely from these two deductions.
For employees in the 8 new metro cities who have both significant HRA exemption and monthly Professional Tax deductions, calculating your exact take-home requires accounting for both. Our tools help with each separately:
Frequently Asked Questions
Which are the 8 metro cities for HRA exemption in FY 2026-27?
What is the HRA exemption formula under Section 10(13A)?
Can I claim HRA exemption under the new tax regime?
What is the ideal monthly rent to maximise HRA exemption?
What if my rent is below 10% of my basic salary?
My employer still shows 40% for Bengaluru. What should I do?
Calculate Your Exact HRA Exemption Now
The formula has three variables, two city types, and a dozen edge cases. You shouldn't be computing this manually. Our free HRA calculator handles all of it — 8 updated metro cities, all 3 conditions shown side by side, ideal rent figure, and annual tax saving estimate — in under 30 seconds.