Good news for salaried employees who are likely to benefit from a higher income tax exemption as the draft Income Tax Rules 2026 propose a major change in House Rent Allowance (HRA) deductions. If approved by Parliament, these changes may apply from April 1, 2026.

According to the draft Income-tax Rules, 2026, the government is proposing to expand the scope of higher HRA tax exemption under the old income-tax regime by extending it to more cities. The proposal aims to align tax relief with increased rental prices in rapidly expanding cities and evolving job trends.

New Income Tax: What is the proposed change?

Currently, salaried employees in Mumbai, Delhi, Kolkata and Chennai can claim an HRA tax exemption of up to 50 percent of their salary while those living in other cities can only claim an exemption of 40 percent. Under the draft rules, cities of Bengaluru, Hyderabad, Pune and Ahmedabad are proposed to be added to the 50 percent category. 

New Income Tax: How will the exemption be determined?

According to the proposal, the method for computing HRA relief will remain the same. The exemption will be determined as the lowest of three figures which is the actual allowance received, the excess of rent paid over 10 percent of pay or a prescribed portion of salary linked to the employee’s city of residence.

New Income Tax: Why HRA matters? 

HRA is a portion of an employee’s salary that an employer contributes to help cover house rent. Under the old tax regime, some part of HRA is not taxed which enables employees to save tax. HRA tax benefit is available only in the old tax regime and not in the new one. Even though the newer framework offers lower slab rates, only those employees who opt for the old system are eligible for the HRA exemption.

New Income Tax: What has govt proposed the changes?

The government has proposed the changes to update HRA norms in response to India’s changing economic landscape. In recent times, cities including Bengaluru, Hyderabad and Pune have drawn in a sizeable salaried population. The proposal also aims to align tax relief with higher rental prices in these rapidly expanding cities. 

The final regulations will be forwarded to Parliament following assessment. If approved, these changes will apply from April 1, 2026.