House Rent Allowance (HRA) is one of the most commonly used tax exemptions by salaried employees who fall into the old tax regime and stay in rented accommodation. Recently, the draft Income-tax Rules, 2026 have proposed a change that could impact how HRA exemption is calculated for employees in certain cities.

The proposal focuses on expanding the list of cities eligible for a higher salary-based ceiling under the HRA exemption formula. While the method of calculation remains unchanged, the move could provide additional tax relief for eligible renters.

The list of cities where the HRA calculation uses a 50% of salary ceiling (instead of 40%) is proposed to expand in Bengaluru, Hyderabad, Pune and Ahmedabad, alongside Delhi, Mumbai, Kolkata and Chennai.

Why This Matters for HRA Claims?

HRA exemption is calculated as the lowest of three values. That structure stays unchanged:

• Actual HRA received during the period
• Rent paid minus 10% of salary
• A location-based ceiling: 50% of salary for the listed cities, 40% for others

Which Salaried Renters May Benefit From HRA Exemption?

This change is most relevant in situations where the exemption was previously being restricted by the salary-based ceiling.

Typically, those are cases where:

• Rent is meaningfully high relative to salary
• HRA received is also substantial
• The 40% ceiling was ending up as the lowest of the three values

In many pay structures, the exemption often gets capped by rent paid minus 10% of salary or by the HRA amount itself. In those cases, shifting the ceiling from 40% to 50% will not change the exemption because the lowest value remains unchanged.

Who May Not See a Difference?

Even if a city moves into the 50% bracket, the exemption may stay the same for employees where:

• HRA received is modest (so that number stays the smallest)
• Rent paid is not high enough to push the exemption close to the ceiling
• The rent-minus-10% computation remains the limiting factor

This is why it is best read as a potential ceiling expansion, not a universal tax break.

How to Check Whether the Higher HRA Ceiling Helps You?

A quick internal check is enough before doing any detailed computation:

• Note your salary for HRA purposes (generally basic plus DA, where applicable)
• Compare 40% of that salary versus 50% of that salary
• If your current HRA exemption is already hitting close to the 40% ceiling, the 50% ceiling can create headroom, provided the other two values are not lower

What Counts as Salary in HRA Exemption?

For this specific HRA computation, salary is not the entire CTC (Cost to Company). The rules clarify salary includes dearness allowance (DA) where applicable under the terms of employment (and excludes other allowances and perquisites).

This distinction matters because applying the percentage to total pay can overstate the likely exemption.

What Documentation Employees Should Keep Ready?

The draft also covers particulars used for salary TDS estimation and reporting. For rent, it states that where aggregate rent paid exceeds ₹1 lakh in a year, rent receipts, landlord particulars such as name, address and PAN (and relationship, if any) are to be provided.

From a compliance and payroll perspective, this is a reminder that HRA claims are not only about eligibility. They are also about maintaining adequate documentation when required.

Timeline and Status for 50% HRA Exemption

The 50% HRA exemption proposal appears in the draft rules released for public consultation, and the draft document states an intended commencement date of 1 April 2026. Taxpayers and employers will ultimately rely on the final notified rules.