Tax relief likely as Bengaluru is added to 50% HRA exception list in I-T draft rules

Hyderabad and Pune are the other cities where taxpayers may soon be able to claim 50 per cent exemption on rent allowance once the draft is approved

Salaried employees in Bengaluru may soon get a significant tax relief. The draft Income Tax Rules 2026 has proposed that taxpayers in four more cities, including Bengaluru, be eligible for House Rent Allowance (HRA) exemption of up to 50 per cent of their salary — on a par with major metro cities of Mumbai, Delhi, Kolkata and Chennai.

HRA exemption rate for other cities, however, will remain at 40 per cent.

HRA is included in an employee's CTC (cost to company) to cover their housing expenses. Under the new tax regime, the entire allowance is fully taxable as opposed to the old tax regime which exempts a portion of the allowance under section 10 (13A) of the Income Tax Act. So, while the new tax regime offers lower tax rates, employees in the old regime can only get an HRA exemption.

Rule 2A of the Income Tax Rules states that employees can claim an exemption from actual HRA received from their company, 50 per cent of salary and the rent paid (10 per cent of their salary).

Apart from Bengaluru, Hyderabad and Pune are the other cities where taxpayers can claim 50 per cent exemption on rent allowance once the proposal is approved. This change is driven by the changing economic landscape as Bengaluru, Pune and Hyderabad have emerged as startup and manufacturing hubs. Their growth has also skyrocketed housing costs, which may have prompted the government to modernise the HRA provisions.