With the government considering expanding the list of cities eligible for a higher House Rent Allowance (HRA) exemption under the old tax regime, salaried employees in several major urban centres could soon see meaningful tax relief. Bengaluru, Hyderabad, Pune and Ahmedabad are likely to be added to the existing metro list of Mumbai, Delhi, Kolkata and Chennai, enabling more taxpayers to claim a higher HRA deduction. Here’s what this could mean for those living in rented homes.
At 38, Arjun Malhotra lives with his working spouse and young child in a rented 3BHK in Hyderabad. Like many professionals in Bengaluru, Pune and Ahmedabad, he has felt the pressure of rising rents, which have squeezed his monthly budget and reduced his ability to invest after accounting for childcare and household expenses. Until now, he has been eligible for a lower HRA exemption than residents of Mumbai, Delhi, Kolkata, and Chennai.
If the proposed revision comes into effect, his taxable income could decline, improving his monthly cash flow. He plans to channel the potential tax savings into systematic investment plans (SIPs), health insurance top-ups and rebuilding his emergency fund, small but strategic steps aimed at strengthening his family’s long-term financial stability.
It should be noted that under the current Income Tax rules (old tax regime), only Mumbai, Delhi, Kolkata and Chennai are classified as ‘metro cities’ for calculating HRA exemption (eligible for 50% of basic salary as the maximum exemption limit). Bengaluru and Hyderabad are not currently classified as metro cities for HRA purposes. They fall under the ‘non-metro’ category (40% of basic salary limit).
Hyderabad, Pune, and Ahmedabad may be included in the metro HRA benefits list
Salary levels and rents across Hyderabad, Bengaluru, Pune and Ahmedabad are now quite similar to the earlier four metros. Under the existing income tax rules, the HRA exemption for metro city residents (Mumbai, Delhi, Kolkata, and Chennai) is the lowest of- actual HRA received, 50% of Basic + DA, or Rent Paid minus 10% of Basic + DA.
“This 50% limit applies only to these four cities, with 40% for others. The draft income tax rules propose adding Bengaluru, Hyderabad, Pune and Ahmedabad to this list, while other cities will continue with the 40% limit,” says Vivek Jalan, Partner at Tax Connect Advisory Services, a multi-disciplinary pan-India taxation firm.
“For eligible renters in cities targeted for the 50% cap – such as Pune, Bengaluru, Hyderabad, Ahmedabad – a bigger slice of HRA can become tax-free under the ‘least of three’ HRA rule,” says Rahul Phondge, Chief Operating Officer – Residential Services, ANAROCK Group.
Higher HRA exemption may reduce tax for renters
After the implementation of labour codes, the basic plus DA should be at least 50% of the total salary. Now consider that a person’s salary is ₹30 lakh. Under the new labour codes, basic pay plus Dearness Allowance (DA) must together form at least 50% of an employee’s total salary. The Basic plus DA would thus be ₹15 lakh. Say HRA is ₹9 lakh, and other allowances are ₹6 lakh.
The rent of a 3BHK in a good housing society in Hyderabad or Bengaluru may be around ₹80,000 per month. “However, earlier the HRA exemption was limited to 40% of Basic plus DA, i.e., ₹6 lakh in the present example. But now it has been increased to 50% of Basic plus DA, i.e. ₹7.5 lakh in the present example. Hence, there will be an additional allowance of ₹1.5 lakh,” says Jalan.
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Since the taxpayer falls in the 31.2% tax bracket, this additional exemption reduces their tax by 31.2% of ₹1.5 lakh, which comes to about ₹47,000. Considering a tax rate of 31.2%, there will be a savings of ₹47,000 approximately for such a taxpayer, which would be around 1.5% of his salary, no mean savings!
Low-rent payers are unlikely to get tax benefits
As we have seen, the HRA tax exemption is calculated using the “least of three” rule: the actual HRA received, 50% of your Basic plus DA if you live in a metro, or your rent paid minus 10% of your Basic salary. The recent proposal to raise the metro cap from 40% to 50% of Basic plus DA may increase the maximum potential exemption. However, this extra benefit only matters if your rent is high enough to reach or exceed the old limit.
Let’s say someone pays a rent of ₹50,000 per month. That means their total rent for the year is ₹6 lakh. When the government calculates the tax-free portion of HRA, one method is “rent paid minus 10% of your basic salary.”
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If the person’s basic salary plus dearness allowance (DA) is ₹15 lakh, 10% of that is ₹1.5 lakh. Subtracting this from ₹6 lakh gives ₹4.5 lakh; this is the maximum HRA they can claim as tax-free based on the rent they actually pay.
Even though the new metro limit is expected to allow up to 50% of Basic + DA as tax-free HRA, the actual exemption cannot exceed your rent minus 10% of Basic + DA. In this example, the person pays ₹50,000 per month, or ₹6 lakh per year. Subtracting 10% of their Basic + DA ( ₹1.5 lakh) gives ₹4.5 lakh. Since this is less than the 50% ceiling ( ₹7.5 lakh), the higher limit doesn’t increase the exemption. Simply put, low rent keeps the tax benefit capped, regardless of the new rule.
Extra tax-free HRA likely to improve disposable income
A higher disposable income can be useful in many ways. “This can help cash flows for EMIs, emergency funds or some discretionary spending. In the long run, renting may become a little more attractive versus buying due to effective lower rent, and the freed-up cash can be channelled into retirement funds or wealth-building instruments like EPF/PPF and mutual fund SIPs for old-regime taxpayers,” says Phondge.
Anagh Pal is a personal finance expert who writes on real estate, tax, insurance, mutual funds and other topics