The first revision to the metro-city HRA list in over two decades — complete guide to the change, new compliance rules, Form 124, and exactly how much more tax you can save from Tax Year 2026-27.
Why This Change Took 25 Years
House Rent Allowance exemption under Section 10(13A) of the Income Tax Act, 1961 — now Rule 279 of the Income Tax Rules, 2026 — has always operated on a two-tier system. Employees residing in metro cities could claim HRA exemption up to 50% of their basic salary plus dearness allowance. All other cities got a lower cap of 40%.
The problem: the list of metro cities was frozen at just four — Delhi, Mumbai, Kolkata, and Chennai — and had not been updated since the rule was originally framed. This classification was set when India’s economic geography looked very different. In the intervening decades, cities like Bengaluru and Hyderabad emerged as among the most expensive rental markets in the country — driven by their IT and startup ecosystems — yet their salaried professionals were being treated on par with taxpayers in Tier-2 cities for HRA purposes.
Bengaluru & Hyderabad — India’s IT capitals
Both cities house the largest concentration of technology companies, MNCs, and start-ups outside Mumbai and Delhi. Average monthly rents in prime areas like Indiranagar, Koramangala, Hitech City, and Gachibowli frequently exceed ₹30,000 — comparable to South Mumbai suburbs and South Delhi.
Pune — manufacturing and BFSI hub
Pune’s emergence as a centre for automobile manufacturing, defence, BFSI, and IT (Hinjewadi, Magarpatta) has driven rental inflation sharply upward. Professionals in Baner, Kothrud, and Wakad routinely pay ₹25,000–₹40,000 in monthly rent.
Ahmedabad — business and pharma hub
As Gujarat’s largest city and a major pharmaceutical and textile manufacturing centre, Ahmedabad has seen steady rental appreciation. The GIFT City development has further accelerated professional migration into the city.
The legislative basis: The CBDT notified the Income Tax Rules, 2026 on 20 March 2026 under Section 533 of the Income Tax Act, 2025. Rule 279 of these new rules formally replaces the old Rule 2A of the Income Tax Rules, 1962, and expands the definition of “specified cities” for HRA purposes from four to eight. The rules are effective from 1 April 2026 — i.e., Tax Year 2026-27 onwards.
Exactly What Changed — Rule 279 of IT Rules 2026
The change is surgical and precisely targeted. Only one element of the three-part HRA exemption formula has been modified — the city classification used in the third condition. The formula itself, the threshold for landlord PAN, the tax regime restriction, and the general documentation requirements remain the same.
| Parameter | Old Rule 2A (IT Rules 1962) | New Rule 279 (IT Rules 2026) | Changed? |
|---|---|---|---|
| Metro cities for 50% cap | Delhi, Mumbai, Kolkata, Chennai (4 cities) | Delhi, Mumbai, Kolkata, Chennai, Bengaluru, Hyderabad, Pune, Ahmedabad (8 cities) | ✦ CHANGED |
| Non-metro cap | 40% of basic + DA | 40% of basic + DA (all cities not in the above 8) | Unchanged |
| Calculation formula | Least of three conditions | Least of three conditions | Unchanged |
| Landlord PAN threshold | Annual rent > ₹1 lakh | Annual rent > ₹1 lakh | Unchanged |
| Tax regime eligibility | Old regime only | Old regime only (HRA remains unavailable under new regime) | Unchanged |
| Declaration form | Form 12BB | Form 124 (replaces Form 12BB) — new landlord-relationship field added | ✦ CHANGED |
| Landlord relationship disclosure | Not required | Mandatory — must declare if landlord is a relative (Rule 205 / Form 124) | ✦ CHANGED |
| Effective from | FY 2025-26 and prior (under IT Act 1961) | Tax Year 2026-27 (from 1 April 2026) | — |
The 8-City Metro Map — Who Gets 50%
From Tax Year 2026-27 (i.e., for salary drawn from April 2026 onwards), the following eight cities qualify for the 50% HRA cap under Rule 279 of the Income Tax Rules, 2026. The city is determined by the employee’s place of residence, not the employer’s office location.
Cities NOT included — despite high rents
- Noida and Gurgaon / Gurugram: Despite being large, high-rent cities adjacent to Delhi, neither qualifies as metro for HRA purposes. An employee living in Noida gets 40% — not 50% — even if their employer’s office is in Delhi. The classification follows the employee’s residential city, not the employer’s city.
- Navi Mumbai and Thane: Administratively separate from Mumbai — employees living here use 40%, not 50%. Those commuting from Navi Mumbai to a Mumbai office must be careful about this.
- Kochi, Jaipur, Chandigarh, Nagpur, Indore, Surat: All continue at 40%, regardless of local rental market conditions.
- Secunderabad: As part of the Hyderabad Urban Agglomeration, Secunderabad employees may be treated as Hyderabad — verify your exact municipal jurisdiction with your employer.
The HRA Calculation Formula — Still the “Least of Three”
The core formula for computing the HRA exemption has not changed under the new rules. The exempt portion of HRA continues to be the least of the following three amounts. Only the percentage applied in the third condition changes for the newly added cities.
HRA Exemption = Minimum of (1), (2), and (3)
40% of salary (Basic + DA) — if residing in any other city or town
What counts as “Salary” in the HRA formula?
For HRA purposes, “salary” means Basic Salary + Dearness Allowance (only the portion of DA that forms part of pay for retirement benefit purposes, i.e., the “DA for retirement” component). It does not include HRA itself, special allowances, overtime, bonus, commission, or other allowances. Many employees confuse “salary” here with their total CTC — use only Basic + qualifying DA in all three conditions above.
Worked Examples — Before & After the Rule Change
The following three examples illustrate the tax impact for employees in Bengaluru, Hyderabad, and Pune. The change in condition (3) from 40% to 50% does not automatically increase the exemption in every case — the benefit depends on which of the three conditions is the binding (lowest) constraint.
Example 1 — Bengaluru IT Professional (Condition 2 is the binding constraint)
Rajan, software engineer, Basic Salary ₹80,000/month, DA nil, HRA ₹30,000/month. Rent paid ₹22,000/month. Annual figures: Salary ₹9,60,000 · HRA ₹3,60,000 · Rent paid ₹2,64,000.
🔴 FY 2025-26 (Bengaluru = 40%)
🟢 TY 2026-27 (Bengaluru = 50%)
Key insight: When Condition 2 (actual rent minus 10%) produces a lower number than both Conditions 1 and 3, the expansion from 40% to 50% in Condition 3 has no practical impact on the exemption. The benefit arises only when Condition 3 was previously the binding constraint.
Example 2 — Hyderabad Senior Manager (Condition 3 WAS the binding constraint — direct benefit)
Priya, finance manager, Basic Salary ₹60,000/month, DA nil, HRA ₹35,000/month. Rent paid ₹32,000/month. Annual: Salary ₹7,20,000 · HRA ₹4,20,000 · Rent paid ₹3,84,000.
🔴 FY 2025-26 (Hyderabad = 40%)
🟢 TY 2026-27 (Hyderabad = 50%)
Example 3 — Pune Architect (High rent scenario — maximum benefit)
Ashwin, architect, Basic Salary ₹1,00,000/month, DA nil, HRA ₹50,000/month. Rent paid ₹55,000/month (premium flat in Koregaon Park). Annual: Salary ₹12,00,000 · HRA ₹6,00,000 · Rent ₹6,60,000.
🔴 FY 2025-26 (Pune = 40%)
🟢 TY 2026-27 (Pune = 50%)
🎓 Practitioner’s Note — When does the 40% to 50% shift actually help?
- The expansion benefits employees only when Condition 3 was previously the binding (lowest) constraint. This typically occurs when: (a) HRA is structured as a large proportion of CTC, and (b) rent paid is very high relative to salary.
- For most mid-level employees where rent-minus-10%-of-salary (Condition 2) remains the lowest, the change has no arithmetic impact — but the employee still gains from being able to claim a higher amount under Condition 3 in future years as their salary rises.
- Advise clients with restructurable CTCs to consider increasing the HRA component in their salary breakup when renegotiating packages — particularly in Bengaluru and Hyderabad where employer HR teams are now updating payroll systems for the 50% rate.
- The maximum possible additional exemption due to this change is 10% of annual salary (the gap between 40% and 50%) — subject to the other two conditions not being lower.
Critical Transition Rule — Which Year Gets Which Rate?
This is the single most important compliance point that is generating confusion among salaried taxpayers who are filing their FY 2025-26 ITR in July 2026. The new 8-city rule applies only from Tax Year 2026-27. For the return being filed right now — covering FY 2025-26 — the old 4-city rule still applies.
| Year | Filing Due Date | Rule Applicable | Metro Cities (50%) | Bengaluru / Hyderabad / Pune / Ahmedabad |
|---|---|---|---|---|
| FY 2024-25 (AY 2025-26) |
31 July 2025 (already past) |
Old Rule 2A, IT Rules 1962 | Delhi, Mumbai, Kolkata, Chennai only | 40% — Non-metro |
| FY 2025-26 (AY 2026-27) |
31 July 2026 Filing NOW |
Old Rule 2A, IT Rules 1962 (IT Act 1961 applies) |
Delhi, Mumbai, Kolkata, Chennai only | 40% — Non-metro |
| TY 2026-27 (ITR due Jul 2027) |
31 July 2027 | New Rule 279, IT Rules 2026 (IT Act 2025 applies) |
Delhi, Mumbai, Kolkata, Chennai, Bengaluru, Hyderabad, Pune, Ahmedabad | 50% — Metro ✦ |
Do NOT apply the 50% rate in your FY 2025-26 ITR
If you are a Bengaluru, Hyderabad, Pune, or Ahmedabad employee currently filing your FY 2025-26 return (AY 2026-27), your HRA calculation must use 40% in Condition 3 — not 50%. The new 8-city rule under IT Rules 2026 is effective from 1 April 2026 (Tax Year 2026-27) and does not apply retrospectively to FY 2025-26 income. Applying 50% for FY 2025-26 would result in over-claiming the exemption, making the return incorrect and potentially triggering a demand or penalty.
New Form 124 — What Replaced Form 12BB
Alongside the expansion of metro cities, the IT Rules 2026 have replaced the long-standing Form 12BB — the investment and rent declaration submitted by employees to employers for TDS computation — with a new Form 124. This is not a cosmetic renaming; Form 124 contains new mandatory fields that did not exist in Form 12BB.
🔴 Old Form 12BB (up to FY 2025-26)
🟢 New Form 124 (from TY 2026-27)
Form 26AS is now Form 168
Alongside the change in declaration forms, the IT Rules 2026 have also renumbered the Annual Tax Statement. The familiar Form 26AS is now designated as Form 168 under the IT Rules 2026. The functionality, contents, and access process remain identical — it is still accessed via the income tax e-filing portal. However, any internal company or CA firm references to “Form 26AS” should be updated to “Form 168” in correspondence dated from TY 2026-27 onwards.
The Landlord Relationship Disclosure — New Compliance Requirement
The most significant new compliance obligation introduced alongside the metro-city expansion is the mandatory disclosure of the taxpayer’s relationship with the landlord. This requirement is embedded in Rule 205 of the IT Rules 2026 and is implemented through the new Form 124. It is specifically designed to address a long-standing avenue of abuse: circular HRA claims where “rent” is purportedly paid to a family member but no actual money changes hands.
What must be disclosed
Under Form 124, you must state: (a) landlord’s name and address, (b) landlord’s PAN (if rent exceeds ₹1 lakh/year), (c) the nature of your relationship with the landlord — whether they are a parent, spouse, sibling, other relative, or a non-related party. If there is no relationship, that fact must be declared.
Why the government wants this data
The IT Department’s data systems will now automatically cross-reference the disclosed relationship against the landlord’s own ITR. If you declare rent paid to your father of ₹15,000/month, the AI will check whether your father has reported ₹1,80,000 as rental income in his ITR. A mismatch triggers an automated query to one or both of you.
Consequence of non-disclosure
If an employee omits the relationship field in Form 124 and the Department later identifies a related-party arrangement through data matching, the HRA exemption can be disallowed for that year. The employee faces a tax demand plus interest on under-deducted TDS. The employer may also face a TDS shortfall notice.
Paying Rent to Parents — Legitimate but Now High-Visibility
One of the most popular — and legally valid — HRA planning strategies has been for an employee to genuinely pay rent to their parents, claim HRA exemption, and allow the parents to show that amount as rental income in their own ITR (where it may be taxed at a lower rate, or even fall below their exemption limit). The IT Rules 2026 have not banned this arrangement. It remains fully legal. However, it is now explicitly captured in the compliance data trail.
Renting from parents is still legal — if done correctly
A genuine rent transaction with parents — with a formal rent agreement, monthly rent paid through banking channels (NEFT/UPI/cheque), and the parent declaring the rental income in their ITR — continues to be a valid and recognised tax planning strategy. The new Form 124 disclosure requirement does not restrict this; it merely makes it visible to the tax system. If you have always been doing this correctly, the new rule changes nothing substantively for you.
Execute a proper rent agreement
A registered rent agreement (or a notarised agreement if registration is not practical for short-duration tenancies) between you and your parent(s). The agreement must specify the monthly rent amount, address of the property, and duration of tenancy. This is your primary documentary defence.
Pay rent through banking channels only
All rent payments must be made via bank transfer, UPI, or cheque — from your account to your parent’s account. Monthly bank statements showing recurring transfers in the declared rent amount are the clearest evidence of genuine payment. Cash rent payments are discouraged and will attract close scrutiny under the new regime.
Parent must declare rental income in their ITR
This is where most arrangements break down — the rent received must be reported by the parent as “Income from House Property” in their ITR (gross rental income minus 30% standard deduction minus municipal tax paid = taxable rental income). Now that the IT Department will auto-match your Form 124 declaration against your parent’s ITR, non-reporting by the parent will directly compromise your exemption claim.
Submit Form 124 honestly disclosing the relationship
In Form 124 submitted to your employer, select “Parent” or the appropriate relationship in the landlord relationship field. Do not leave it blank or state “None” if you are paying rent to a family member. An incorrect declaration here, if discovered during scrutiny, invalidates the entire HRA claim for the year — regardless of whether the underlying transaction was genuine.
Ensure the property actually belongs to the parent
You cannot pay rent to a parent for a property that is in your own name or jointly held. The house must be owned by (or legitimately leased to) the parent in their own right. If the property was gifted by you to the parent, the arrangement may be challenged as a sham transaction. Verify the property ownership documents before structuring the arrangement.
Arrangements that will be disallowed — now more easily detected
- Rent “paid” in cash with no bank trail: The combination of the new relationship disclosure and the IT Department’s bank data (from SFT-001/002 filings by banks) makes cash-only rent transactions between relatives very easy to flag.
- Spouse as landlord: Courts and the IT Department have consistently held that rent paid to a spouse, where the husband and wife live together in the same property, is not genuine. HRA claimed on such arrangements is routinely disallowed.
- Parent not owning the property: If your parent lives in your house and you “pay” them rent — the claim fails on the fundamental requirement that the landlord must have title or right to the property.
- Rent declared but parent’s ITR shows no rental income: Post Form 124 disclosure, this will be auto-flagged in the next processing cycle. Both the employee’s HRA claim and the parent’s ITR will be queried simultaneously.
What Employers Must Do — Immediate Action Items
The change to 8 metro cities and the introduction of Form 124 creates immediate obligations for HR, payroll, and finance teams. Employers who fail to update their systems risk being liable for TDS shortfall on salary — even if the employee subsequently claims the correct exemption at ITR stage.
Update payroll software for new city classification
All payroll systems, HRMS platforms, and TDS calculation tools must be updated to recognise Bengaluru, Hyderabad, Pune, and Ahmedabad as metro cities from April 2026. Employees in these cities whose payroll was computing HRA at 40% must have their TDS revised prospectively — with no demand / excess deduction adjustable in the year.
Replace Form 12BB with Form 124
Collect fresh investment and HRA declarations from all employees using the new Form 124 — not the old Form 12BB. The new form must include the landlord relationship field for all HRA claims. HR teams using payroll service providers should confirm their provider has implemented the Form 124 format.
Verify and retain landlord relationship data
The landlord relationship data collected via Form 124 must be retained as part of TDS records for at least 7 years. In case of TDS scrutiny or demand, the employer must produce evidence that the declaration was collected and that TDS was computed accordingly. Do not delete or archive these records prematurely.
Communicate the change to employees
Many employees in Bengaluru, Hyderabad, Pune, and Ahmedabad do not yet know that their city is now classified as metro for HRA. Proactively communicate via payroll/HR circulars that HRA will now be computed at the 50% rate from April 2026 — and that a fresh Form 124 is required to reflect updated declarations.
TDS mismatch risk if payroll system not updated in time
If an employer in Bengaluru continued to deduct TDS at the 40% HRA rate for April and May 2026 (before updating payroll systems), the excess TDS deducted can be adjusted in subsequent months of the same Tax Year — as long as the aggregate TDS for the full year is correct by March 2027. However, after the financial year ends, the employee must claim the correct HRA exemption at the time of filing the ITR — this self-correction is straightforward, but ensure that Form 16 Part B reflects the correct 50% computation, not the payroll system’s erroneous 40%.