The government is considering changes to income tax rules to deal with rising house rents.
According to the draft Income Tax Rules 2026, the government may expand the list of cities eligible for higher House Rent Allowance (HRA) tax exemption.
At present, higher HRA exemption is available only in four metro cities: Mumbai, Delhi, Kolkata, and Chennai.
Cities Proposed for Higher HRA Exemption
The government has proposed adding four more cities to the list of cities eligible for a 50% HRA exemption. These cities are:
Bengaluru
Hyderabad
Pune
Ahmedabad
Currently, employees in these cities get only a 40% HRA exemption under existing rules. If the proposal is approved, they will also receive a 50% exemption, similar to metro cities.
How Employees Will Benefit
Under current income tax rules, HRA exemption is calculated by comparing three amounts, and the lowest amount is considered tax-free:
The actual HRA received by the employee
50% of basic salary plus DA for metro cities (40% for other cities)
Rent paid minus 10% of basic salary plus DA
If the new rules are implemented, employees working in Bengaluru, Hyderabad, Pune, and Ahmedabad will get higher tax benefits.
These cities will be treated like metro cities for HRA purposes, which will increase tax savings for many employees.
Final Decision Still Pending
The proposal is currently in draft form. The government will take a final decision after receiving suggestions and objections from stakeholders. If approved, working professionals in high-rent cities are expected to get significant tax relief.
