Clipped from: https://www.financialexpress.com/money/your-money-disclose-relationship-with-landlord-to-claim-hra-4194614/
The Income Tax Rules 2026 expand the 50% HRA exemption to four new cities—Bengaluru, Hyderabad, Pune, and Ahmedabad—aligning them with traditional metros.
The Income Tax Rules 2026 mark a notable shift in the treatment of House Rent Allowance (HRA), by expanding the list of metro cities and tightening of reporting requirements. Employees claiming HRA now need to furnish additional disclosures, including the relationship with the landlord, and mandatorily submit a copy of rental agreement along with prescribed forms.
While the income tax law does not prohibit claiming of HRA exemption for rent paid to relatives, such claims have historically attracted deeper scrutiny from the income tax authorities. Given the same, the enhanced disclosure norms under the new rules are designed to increase transparency and discourage non-genuine HRA exemption claims, particularly in cases involving arrangements with relatives.
Claim verification
For employers, the changes translate into a greater responsibility from payroll and claim verification perspective. Employers may need to revisit internal policies and strengthen verification processes to capture, review, and retain the additional documents before granting HRA exemption while computing payroll withholding taxes. This may include validating rental agreements, ensuring consistency between employee declarations and supporting documents.
The changes also revive the debate around the choice between old and new tax regimes for salaried taxpayers. As HRA tax benefit is not available under the new regime, the expansion of metro-cities based benefit, may tilt the balance in favour of the old regime for certain taxpayers, particularly those incurring substantial rental expenses.
While the move signals an attempt to align tax provisions with India’s evolving urban landscape, it also exposes inconsistencies particularly for taxpayers in the National Capital Region (NCR). Historically, the HRA framework recognised only four cities Delhi, Mumbai, Chennai and Kolkata, as metro cities. This classification is critical, as it determines the extent of exemption available to salaried individuals.
Dual-test requirement
Under the existing mechanism, HRA exemption is calculated as the least of three components, one of which is capped at 50% of basic salary for metro cities and 40% for non-metros. In the Income Tax Rules 2026 applicable from tax year 2026-27, this list has been expanded to include Hyderabad, Pune, Ahmedabad and Bengaluru. For employees residing in these cities, the change enhances the exemption threshold, potentially lowering taxable income and offering incremental income tax relief.
As the detailed provisions indicate, the relief is not as uniform as it appears. Rule 279(1)(c) of the Income Tax Rules 2026 introduces a dual-test, requiring both, location of employment and rented residential accommodation be situated in the same city, to avail the higher 50% exemption. Where these conditions are not met simultaneously, the benefit may be restricted to 40%, even if one of the locations is a metro city.
This could have significant implications in an era of hybrid or remote work. For instance, an employee working remotely from a rented accommodation in a metro city, while being employed by a non-metro city-based employer organisation may not qualify for a higher 50% exemption. Similarly, an employee residing in rented premises in Noida or Gurugram, while employed by an employer located in Delhi, faces a similar ambiguity. Likewise, scenarios where both locations i.e. residential accommodation and location of employment are in different metro cities, may still raise interpretational doubts on whether the 50% benefit should be available.
(The writer is partner, Nangia Global. Inputs from Sanjay Kumar and Aditya Goyal)
Disclaimer: The views expressed are the author’s own and do not reflect the official policy or position of Financial Express.
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