Salary tax · 3 MIN READ
HRA in eight cities under the 2026 rules
An employee in Bengaluru sees a headline about the new HRA rule and expects the whole housing allowance to become tax free. Payroll makes a smaller adjustment. Both sides are looking at the same headline, but only one is looking at the complete calculation.
Rule 279 of the Income-tax Rules, 2026 lists Mumbai, Kolkata, Delhi, Chennai, Hyderabad, Pune, Ahmedabad and Bengaluru for the 50% salary criterion. Other places use 40%. These percentages are one part of the HRA exemption test; they are not a promise that half of every employee’s gross salary becomes exempt. [1]
Work through the actual amounts
Consider an employee who both works and occupies rented accommodation in Bengaluru. Assume the relevant monthly salary for this rule is ₹60,000, HRA received is ₹32,000 and actual rent is ₹40,000. Also assume the employee uses a tax treatment under which HRA exemption is available and satisfies the other conditions.
The three amounts are HRA received of ₹32,000, rent above one-tenth of salary of ₹34,000, and the city-based salary amount of ₹30,000. The least is ₹30,000. The remaining ₹2,000 of HRA is not exempt under this illustration.
Using a 40% city amount would instead produce ₹24,000 as the limiting figure. The difference here is ₹6,000 of taxable salary for the month. It is not ₹6,000 of tax saved. The actual tax effect depends on the person’s annual computation.
Use the salary definition for this rule
The salary figure used in an HRA calculation needs its own definition. Do not simply point the formula at the payslip’s gross earnings column or the annual CTC amount. Rule 279 explains its salary and relevant-period terms. [1]
Keep an approved mapping of the components used. If a salary revision takes effect during the year, the rent period, HRA amount and relevant salary can change. One annual average should not silently replace a period-wise calculation when the facts differ.
Check the person as well as the city
Payroll needs the employee’s actual occupation of rented accommodation, the rent paid, the relevant dates and the supporting claim. Where home and work are in different cities, get the facts reviewed against the rule rather than deciding from the company’s registered-office address.
The employee claim process now uses Form 124 for the applicable new framework. The Department’s FAQs describe the form as a statement of claims supported by evidence. A city appearing in the list does not remove the need for that evidence. [2]
Explain the result before changing the payslip
Tell employees which figure limited the exemption. A short explanation such as “your HRA received is lower than the other two amounts” is more useful than saying the system calculated it.
Finally, check the employee’s tax regime. HRA exemption does not become available under a regime that excludes it simply because more cities qualify for the 50% criterion. Update the calculation, the employee communication and the proof checklist together.
Sources & further reading
- Income tax Rules 2026 notified 20 March 2026 Gazette rules
- Income Tax Department Form 124 FAQs Official tax guidance
This article is general information, not individual legal or tax advice. Applicable rules depend on the financial year, state, employment terms and your circumstances. Have a correction? Contact hello@payrolladvisor.in.