Tax Talk: Expanded metro list for HRA adds shine to old tax regime – Money News | The Financial Express

Clipped from: https://www.financialexpress.com/money/tax-talknbspexpanded-metro-list-for-hra-adds-shine-to-old-tax-regime-4157132/

The draft Income Tax Rules 2026 propose expanding the 50% HRA exemption limit to Bengaluru, Hyderabad, Pune, and Ahmedabad.

Draft Tax Rules 2026: Bengaluru, Pune, and Hyderabad Set for 50% HRA Exemption; New Landlord Disclosure Mandated

FOR MANY SALARIED taxpayers, especially those residing in high-rent cities, the ability to claim house rent allowance (HRA) exemption often determines whether the old regime results in lower tax outgo compared to the concessional new regime.

Recognising its importance, the income tax department has introduced draft Income Tax Regulations proposing much-anticipated changes to HRA rules.

Expansion of metro cities

Under the existing framework, employees residing in notified metro cities are eligible to claim HRA exemption up to 50% of salary (basic plus dearness allowance), while those in non-metro cities are limited to 40%. Historically, only a few cities qualified as metros, despite several urban centres experiencing comparable rental inflation. 

The draft regulations propose the inclusion of additional cities within the metro category. Under the proposed draft income tax rules, the exemption of 50% which was earlier available for Mumbai, Kolkata, Delhi, Chennai has now been extended to Hyderabad, Pune, Ahmedabad and Bengaluru. 

Consider an employee with a salary of Rs 15 lakh. Under the non-metro classification, the maximum exemption component linked to salary would be 40%, i.e., Rs 6 lakh. If the city now qualifies as a metro, the ceiling rises to 50%, i.e., Rs 7.5 lakh. Subject to the overall HRA calculation including actual HRA received and rent paid in excess of 10% of salary, this higher limit can translate into tangible tax savings. For many taxpayers wondering whether to opt for the old regime, this change may make the difference in favour of retaining exemptions and deductions.

Revised TDS declaration

Alongside enhanced benefits, the draft regulations introduce a compliance-oriented change. Employees will now be required to disclose the relationship, if any, with their landlord while submitting declarations to employers for TDS purposes. While rent paid to family members is legally permissible if it represents a genuine tenancy arrangement, the absence of structured disclosure has sometimes led to scrutiny and disputes. The revised declaration format seeks to improve transparency and deter non-genuine claims.

This change places greater responsibility on employees to maintain proper documentation including rent agreements, rent receipts, PAN details of landlords, and proof of actual rent payment through identifiable banking channels. Employers, in turn, may need to update payroll processes to capture and verify these additional disclosures.

What it means for taxpayers

Taken together, these draft reforms reflect a calibrated approach. Providing relief where urban rental realities justify higher deductions, while simultaneously tightening procedural safeguards to curb misuse. Salaried individuals should review their rental arrangements, evaluate the impact on their tax planning strategy, and ensure that documentation is robust. 

The writer is partner, Nangia & Company. Inputs from Neetu Brahma

Disclaimer: The views expressed are the author’s own and do not reflect the official policy or position of Financial Express.