HRA in Ahmedabad, Bengaluru, Hyderabad and Pune Is Now 50%: What Payroll Must Change
From 1 April 2026, the Income-tax Rules, 2026 let employees living in Ahmedabad, Bengaluru, Hyderabad and Pune claim HRA exemption up to 50% of salary instead of 40%, the same as Mumbai, Delhi, Kolkata and Chennai. It helps only old-regime employees whose rent is high relative to salary. Payroll should update city settings and recompute TDS.
For years, an employee renting a flat in Ahmedabad or Bengaluru got a smaller HRA exemption than a colleague in Mumbai, simply because the old rules listed only four metro cities. That changed on 1 April 2026. To see the effect on one salary, use the HRA exemption calculator.
What changed
The Income-tax Rules, 2026, notified by the CBDT on 20 March 2026 and in force from 1 April 2026, raised the HRA limit for four more cities:
| City group | HRA limit (share of salary) |
|---|---|
| Mumbai, Delhi, Kolkata, Chennai | 50% (unchanged) |
| Ahmedabad, Bengaluru, Hyderabad, Pune | 50% (was 40%) |
| All other places | 40% |
"Salary" here means basic pay plus dearness allowance (where it counts for retirement benefits), plus any commission fixed as a percentage of turnover.
How the exemption is worked out
The tax-free part of HRA is the lowest of three amounts:
- the HRA actually received;
- rent paid minus 10% of salary;
- 50% of salary (or 40% outside the eight cities).
The change only helps when the third amount is the lowest, which is common where rent is high compared with salary.
A worked example
An engineer in Ahmedabad earns a basic salary of ₹50,000 a month, gets ₹25,000 HRA and pays ₹35,000 rent.
| For the year | Amount |
|---|---|
| HRA received | ₹3,00,000 |
| Rent minus 10% of salary (₹4,20,000 − ₹60,000) | ₹3,60,000 |
| 40% of salary (old rule) | ₹2,40,000 |
| 50% of salary (new rule) | ₹3,00,000 |
| Exempt HRA before | ₹2,40,000 |
| Exempt HRA now | ₹3,00,000 |
₹60,000 more is tax-free. At a 30% rate plus cess, that saves about ₹18,700 a year.
Only under the old tax regime
HRA exemption is available only to employees who choose the old regime. Employees in the new regime, which is the default, get no HRA exemption at all. The change may tip some employees in these four cities back towards the old regime, so it is worth telling them.
What payroll should update
- Change the city master. Mark Ahmedabad, Bengaluru, Hyderabad and Pune as 50% cities from April 2026.
- Recalculate TDS for old-regime employees in these cities, spreading the lower tax over the remaining months of the year.
- Use the city of residence, not the office location. The exemption depends on where the employee lives and pays rent.
- Collect rent receipts, and the landlord's PAN where annual rent exceeds ₹1 lakh.
- Remind employees at the next declaration window that the change applies from Tax Year 2026-27.
Frequently asked questions
Does it apply to FY 2025-26 returns?
No. The 50% limit for the four cities applies from 1 April 2026. Returns for FY 2025-26 use the old four-city list.
An employee lives in Gandhinagar and works in Ahmedabad. Which rate applies?
The rate follows the city where the rented house is, so check the address on the rent agreement. Gandhinagar is not on the list.
Do employees in the new regime gain anything?
Not from this change. Some may now save more under the old regime, so they should compare both.
Sources
- ✓Final Income-tax Rules 2026 notified: HRA and regime choice, Upstox
- ✓HRA exemption: eight cities now qualify for 50%, TaxGuru
- ✓April 1 tax changes: HRA, meal cards and Form 130, Business Today
This is a summary, not tax advice. Confirm with your chartered accountant before you rely on it.
Written by
HR Manager, Airwix Technologies (Sleet)
Nihit Dobariya is the HR Manager at Airwix Technologies in Ahmedabad, where he runs HR and payroll for the team behind Sleet. He writes about payroll, PF and ESIC, professional tax, the labour codes and everyday HR practice for Indian employers, and checks each rule against the official notification before it is published.
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