For salaried employees living in rented accommodation, House Rent Allowance (HRA) exemption under Section 10(13A) read with Rule 2A is one of the most valuable exemptions in the old regime. From FY 2026-27 (1 April 2026), the new Income-tax Act 2025 has expanded the list of metro cities from 4 to 8 – the most consequential change to the HRA framework in decades. This guide walks through what changed, how to compute the exemption correctly, and where the new rule actually pays off.
The 8 metro cities for HRA – effective FY 2026-27
The Income-tax Act 2025, effective 1 April 2026, lists the following 8 cities as metros for the purpose of Section 10(13A):
- Mumbai (and Navi Mumbai, Thane)
- Delhi (NCT)
- Kolkata
- Chennai
- Bengaluru (newly added)
- Pune (newly added)
- Hyderabad (newly added)
- Ahmedabad (newly added)
Employees residing in any of these 8 cities are eligible for the higher 50% of basic salary cap on HRA exemption. All other cities continue to use the 40% of basic salary cap.
How HRA exemption is calculated – the 3-step rule
Under Section 10(13A) read with Rule 2A, the exempt portion of HRA is the least of the following three amounts:
- Actual HRA received from the employer during the year (or month-by-month if rent / city / salary changes mid-year);
- Rent paid in excess of 10% of salary (rent paid minus 10% of basic salary plus dearness allowance forming part of retirement benefits);
- 50% of salary if the employee resides in a metro city, or 40% of salary for any other city.
The lowest of these three is the exempt portion. The balance HRA is taxable as salary income.
Worked example – Bengaluru employee under the new 8-metro rule
Consider a salaried employee in Bengaluru with the following monthly salary structure for FY 2026-27:
- Basic salary: Rs. 60,000
- HRA received: Rs. 30,000
- Actual rent paid: Rs. 30,000
The 3-step calculation works as follows:
| Step | Computation | Amount per month |
|---|---|---|
| (a) Actual HRA received | Given | Rs. 30,000 |
| (b) Rent – 10% of basic | 30,000 – 6,000 | Rs. 24,000 |
| (c) 50% of basic (metro) | 50% x 60,000 | Rs. 30,000 |
| Exempt HRA (least of above) | Step (b) is the least | Rs. 24,000 |
| Taxable HRA | 30,000 – 24,000 | Rs. 6,000 |
Annual exempt HRA = Rs. 24,000 x 12 = Rs. 2,88,000. At a 30% slab, this saves the employee approximately Rs. 86,400 in tax. Note: under the pre-2026 rule, this same employee in Bengaluru would have used the 40% cap (Rs. 24,000) – which in this specific example happens to coincide with Step (b), so the cap upgrade does not change the outcome here. The benefit emerges where rent is high relative to basic – shown next.
Where the 8-metro upgrade actually pays off
Take the same Bengaluru employee but with a higher rent of Rs. 40,000 per month (a realistic 2BHK in central Bengaluru):
| Step | Pre-2026 (40% cap) | FY 2026-27 (50% cap) |
|---|---|---|
| (a) Actual HRA | Rs. 30,000 | Rs. 30,000 |
| (b) Rent – 10% basic | 40,000 – 6,000 = 34,000 | 40,000 – 6,000 = 34,000 |
| (c) % of basic cap | 40% x 60,000 = 24,000 | 50% x 60,000 = 30,000 |
| Exempt HRA | Rs. 24,000 (cap binds) | Rs. 30,000 (HRA is least) |
| Annual exempt | Rs. 2,88,000 | Rs. 3,60,000 |
| Tax saving at 30% | Rs. 86,400 | Rs. 1,08,000 |
The cap upgrade gives this Bengaluru employee an additional Rs. 21,600 in annual tax savings. The benefit is most pronounced where the rent is high enough that Step (c) (the percentage cap) was the binding constraint under the old rule.
Calculate your HRA exemption with the 8-metro update
Plug in your basic, HRA and rent and our calculator applies the correct FY 2026-27 metro / non-metro cap automatically.
Open HRA CalculatorOld regime only – HRA is not available in the new regime
This is a critical point. HRA exemption under Section 10(13A) is available only under the old tax regime. Employees who have opted for the default new tax regime under Section 115BAC cannot claim HRA exemption regardless of city – the 8-metro list is irrelevant for them. Before deciding to claim HRA, salaried employees should compare their tax liability under both regimes – our Income Tax Calculator does this side by side.
Documents and compliance checklist
- Rent receipts for every month claimed – employers can ask to verify;
- Rental agreement if the employer requests it;
- Landlord’s PAN – mandatory if annual rent exceeds Rs. 1,00,000 (Form 12BB declaration). Without it, the exemption is denied;
- Bank transfers preferred – cash payments above Rs. 5,000 are increasingly scrutinised by the assessing officer;
- Section 194-IB TDS – if you are an Individual / HUF (not subject to tax audit) paying rent above Rs. 50,000 per month, you must deduct TDS at 2% from the last month’s rent.
Frequently Asked Questions
Can I claim HRA if I live with my parents and pay them rent?
Yes. You must genuinely pay rent (preferably by bank transfer), the parents must declare that rent as their income in their ITR, and you should hold a written rental agreement plus rent receipts. The employer may also ask for the parents’ PAN where annual rent exceeds Rs. 1 lakh.
Can I claim HRA exemption and home loan interest deduction simultaneously?
Yes – if you own a house in one city but live in rented accommodation in another (e.g. for work). You can claim HRA on the rented property and the home loan interest under Section 24(b) on the owned property.
Does the 8-metro rule apply for FY 2025-26 returns?
No. The 8-metro list applies only from FY 2026-27. If you are filing your ITR for FY 2025-26 (assessment year 2026-27, due 31 July 2026), use the old 4-city rule (Mumbai, Delhi, Kolkata, Chennai only at 50%; everywhere else at 40%).
What if my city is not on either list?
If you live in any city other than the 8 listed metros (for example Jaipur, Lucknow, Coimbatore, Indore, Bhubaneswar), use the 40% of basic salary cap. The 8-metro list is closed – other cities are non-metro for HRA purposes.
How does the calculation work if I changed cities mid-year?
Compute the exemption month-by-month. For each month, take the actual HRA received that month, the rent paid that month, and the city’s metro / non-metro status that month. Sum the monthly exempt amounts for the year.