How HRA exemption is calculated: the new 8-metro rule, rent to parents, and what changed from April 2026

> Your HRA exemption is the lowest of three calculated amounts, not the full HRA your employer pays. From April 1, 2026 the rules changed: four new cities (Bengaluru, Hyderabad, Pune, Ahmedabad) now qualify for the higher 50% limit. This article shows you the math for both your FY 2025–26 return (deadline 31 July 2026) and your FY 2026–27 planning, with rent-to-parents rules, the mid-year city-change formula, and what to do if your payslip has no HRA component.

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The House Rent Allowance shown on your salary slip is a fixed monthly amount. The portion that is actually tax-free is almost always smaller. It is calculated under Section 10(13A) of the Income Tax Act, read with the applicable Income Tax Rules. Here is how to find your real exempt amount, and how the April 2026 rule change affects you.

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The three-part formula

For each month, calculate all three of these:

The actual HRA your employer paid you that month.

50% of your salary if you live in a metro city, or 40% if you live anywhere else.

The actual rent you paid that month, minus 10% of your salary.

Whichever of the three is lowest is your monthly HRA exemption. The remainder of your HRA is taxable as salary income.

> Definition: "Salary" for HRA

> Salary here is not your CTC and not your gross pay. It is basic salary + dearness allowance (only if DA forms part of salary for computing your retirement benefits) + commission (only if paid as a fixed percentage of turnover). For most private-sector employees, DA is either zero or does not count toward retirement benefits, so salary = basic salary on your payslip. Check with your payroll team if your offer letter shows a DA component.

> ⚠ Common mistake: Most employees assume the HRA line on their payslip is fully tax-free. It rarely is. In a majority of cases, either limit 2 (the 40%/50% cap) or limit 3 (the rent-minus-10% calculation) brings the exempt amount below the HRA actually received.

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Which cities count as "metro": the rule changed on 1 April 2026

This is the most consequential thing to get right in 2026, because the metro list expanded for the first time in decades.

For your FY 2025–26 return (income earned April 2025 to March 2026, filing by 31 July 2026):

The Income Tax Rules 1962 govern. Only four cities qualify for the 50% limit:

For FY 2026–27 onwards (income earned from 1 April 2026):

The Income Tax Rules 2026, notified by CBDT on 20 March 2026 to operationalise the Income Tax Act 2025, replaced the 1962 Rules with effect from 1 April 2026. They expanded the metro list to eight cities:

The 40% limit continues to apply to every other city.

If you live in Bengaluru, Hyderabad, Pune, or Ahmedabad: your FY 2025–26 return uses the 40% limit. Your FY 2026–27 planning uses 50%.

> ◇ Quick check: Which financial year are you working on? If you are filing your return this summer, you are still on the 4-metro list. If you are calculating your tax-saving strategy for the current year, you are on the new 8-metro list.

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Worked example: Aarav in Bengaluru

Aarav's payslip shows the following each month:

His "salary" for HRA purposes is ₹70,000 (basic only; no DA component).

FY 2025–26 (Bengaluru = non-metro under IT Rules 1962, 40% limit):

Exemption: ₹28,000/month = ₹3,36,000 per year. Limit 2 (the city cap) binds.

FY 2026–27 (Bengaluru = metro under IT Rules 2026, 50% limit):

Exemption: ₹33,000/month = ₹3,96,000 per year. Limit 3 now binds; the city cap rose to match the HRA paid.

The reclassification gives Aarav ₹60,000 more annual exemption without him changing a single thing about his salary, rent, or employer. At a 31.2% marginal tax rate (30% slab + 4% cess), that is approximately ₹18,720 in actual tax saved per year.

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Worked example: Divya in Delhi

Same package as Aarav, but Delhi was already metro before the rule change:

Exemption: ₹33,000/month = ₹3,96,000 per year, in both FY 2025–26 and FY 2026–27. Limit 3 binds in both years; nothing changes for Delhi residents.

The takeaway from the two examples: Aarav in Bengaluru effectively "catches up" to Divya in Delhi from FY 2026–27 onwards. Before that, his exemption was capped ₹5,000/month below hers despite identical salary and rent.

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Paying rent to your parents

Paying rent to a parent and claiming HRA exemption is fully legal under the Income Tax Act, in both rule sets. The rules tightened slightly from FY 2026–27 with a new disclosure step. Here is what is required in both years and what changed.

Always required (FY 2025–26 and FY 2026–27):

• A written rental agreement between you and the parent, stating address, monthly rent, and duration. Does not need to be notarised, but must exist.
• Bank-transfer payments only. UPI, NEFT, IMPS, or cheque. Cash leaves no trail and will not hold up under scrutiny.
• Rent receipts from the parent for each month or quarter.
• The parent must own the property. You cannot claim HRA on a property you own, co-own with the parent, or that is in your spouse's name.
• The parent must declare the rent as income under the head "Income from House Property" in their own ITR. The Income Tax Act allows a 30% standard deduction on house property income, so ₹4,20,000 in annual rent becomes ₹2,94,000 taxable after the deduction. Whether this triggers tax for the parent depends on their age and other income:

- Under 60 years: basic exemption is ₹2.5 lakh (old regime)

- 60–80 (senior citizen): ₹3 lakh

- Above 80 (super senior citizen): ₹5 lakh

• PAN of the parent must be given to your employer if annual rent exceeds ₹1,00,000 (₹8,333/month). Without PAN, exemption above this threshold is denied.

New from FY 2026–27 (IT Rules 2026):

• Mandatory relationship disclosure. Form 124 (which replaced Form 12BB from 1 April 2026 as the employee's salary-investment declaration to the employer) now requires you to explicitly disclose your relationship with your landlord when claiming HRA exemption. For rent paid to a parent, you state "parent." For rent paid to a sibling, "sibling." For an unrelated landlord, "unrelated." The disclosure does not disqualify the claim; it makes related-party rent arrangements visible to the assessing officer.

Not allowed (both years):

• Paying rent to your spouse. The IT Department treats these arrangements as non-genuine and has consistently disallowed them.
• Claiming HRA on a property you own, fully or partially, even jointly with the parent you are paying.

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What if you change cities mid-year?

You calculate the exemption separately for each period, then add them. A single blended annual rate is wrong, especially when the limits differ between cities.

Example: Delhi April–September 2026, Bengaluru October 2026–March 2027 (FY 2026–27):

Both cities are metro from FY 2026–27, so both periods use 50%. Calculate the three limits for the Delhi period using the Delhi rent, and again for the Bengaluru period using the Bengaluru rent. Take the minimum for each period, then sum.

Example: Delhi April–September 2025, Bengaluru October 2025–March 2026 (FY 2025–26):

Delhi is metro (50%), Bengaluru is still non-metro for this FY (40%). The two periods use different ceilings. Calculate each separately.

If your employer's payroll software was not updated when you moved, your Form 16 may apply the wrong rate for the post-move months. Flag this with HR when the move happens; fixing it at year-end is messy.

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If your payslip has no HRA component: Section 80GG

Some employers do not break out HRA as a separate component. Self-employed professionals have no HRA at all. In both cases, Section 10(13A) does not apply, but Section 80GG offers a smaller alternative deduction for rent paid.

The Section 80GG deduction is the lowest of:

• ₹5,000 per month (₹60,000 per year)
• 25% of your adjusted total income
• Actual rent paid minus 10% of adjusted total income

For most urban renters, the ₹60,000 annual cap is the binding limit. It is materially smaller than what HRA exemption delivers, but it is better than nothing.

Eligibility:

• You, your spouse, your minor child, or the HUF of which you are a member must not own any residential property in the city where you ordinarily reside or work.
• If you own residential property elsewhere in India, you can still claim 80GG only if that property is not treated as self-occupied in your ITR (i.e., it is actually let out, or treated as let out under the deemed-let-out rules).

Procedural requirement: Form 10BA is mandatory. Section 80GG cannot be claimed without filing Form 10BA, a self-declaration confirming you meet all conditions. It is filed online before submitting your ITR and is required for every year you claim 80GG.

Section 80GG is only available under the old tax regime. Under the new regime, it is not allowed.

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HRA and the old vs new regime choice

Section 10(13A) HRA exemption is only available under the old tax regime. Under the new regime, your full HRA is taxable as salary income.

For someone like Aarav in the example above, that is ₹3.96 lakh of annual exemption that vanishes under the new regime. Before you choose your regime for FY 2026–27, work out your total old-regime deductions: HRA exemption + Section 80C + Section 80D + home loan interest. Then compare your total tax under each regime at your taxable income. For most renters in metro cities with high rent, the old regime remains materially better; for non-renters or low-deduction profiles, the new regime usually wins.

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Bottom line

• HRA exemption is the lowest of three monthly amounts: actual HRA received, 50%/40% of salary, and rent paid minus 10% of salary.
• "Salary" = basic + DA (if it counts for retirement benefits) + commission (if fixed % of turnover). For most private-sector employees this is just basic salary.
• FY 2025–26 returns: 4 metro cities (Mumbai, Delhi, Chennai, Kolkata). Bengaluru, Hyderabad, Pune, Ahmedabad use the 40% limit.
• FY 2026–27 onwards: 8 metro cities. Bengaluru, Hyderabad, Pune, and Ahmedabad now use the 50% limit.
• Paying rent to parents is legal with a rental agreement, bank transfers, rent receipts, PAN above ₹1L/year, and the parent declaring the income. From FY 2026–27, you must also disclose the landlord relationship in Form 124.
• City changes mid-year require a split calculation, not a blended annual rate.
• No HRA on your payslip? Section 80GG, capped at ₹60,000/year, requires Form 10BA, old regime only.
• HRA exemption itself is only available under the old tax regime.

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Last verified: 17 May 2026.

Applicable to: FY 2025–26 / AY 2026–27 (Income Tax Act 1961, IT Rules 1962, Rule 2A) and FY 2026–27 / AY 2027–28 (Income Tax Act 2025, IT Rules 2026, Rule 279).

Sources:

• Section 10(13A), Income Tax Act 1961 / equivalent provision under Income Tax Act 2025
• Rule 2A, Income Tax Rules 1962 (applicable to FY 2025–26 returns)
• Rule 279, Income Tax Rules 2026 (applicable from FY 2026–27)
• CBDT notification dated 20 March 2026 (IT Rules 2026)
• Section 80GG and Form 10BA: incometax.gov.in
• Form 124 (replaces Form 12BB) under IT Rules 2026

Related articles:

• [Can I pay rent to my parents and claim HRA exemption legally?](/personal-finance/pay-rent-to-parents-hra-exemption)
• [How HRA is calculated: the three-part formula and when HRA is fully taxable](/personal-finance/hra-calculation-formula-india)
• [New tax regime vs old tax regime: which is better for you?](/tax/new-tax-regime-vs-old-tax-regime)