Tax
HRA exemption under the old and new tax regimes
HRA is exempt only under the old regime. See the least-of-three formula and why the metro list differs between AY 2026-27 and Tax Year 2026-27.
HRA is exempt only under the old tax regime, and the exemption is the least of three amounts: actual HRA received, rent paid minus 10% of salary, and 50% or 40% of salary according to the city. The date matters in 2026: the return for AY 2026-27 still has four 50% cities, while Tax Year 2026-27 has eight under the newly notified Rule 279.
That is not a contradiction. Two tax laws are running side by side during the transition, and each governs a different period of income.
First settle which 2026-27 you mean
AY 2026-27 is the assessment year for income earned from 1 April 2025 to 31 March 2026. The Income Tax Department says that return remains governed by the Income-tax Act, 1961 even though it is filed after the new Act began. Its HRA computation therefore uses the familiar Section 10(13A) and Rule 2A framework.
Tax Year 2026-27 means income earned from 1 April 2026 to 31 March 2027. That period is governed by the Income-tax Act, 2025 and the Income-tax Rules, 2026. The relief now sits at Schedule III, Table serial number 11, and Rule 279 supplies its limits.
The formula is substantially the same. The city list is not. If you are filing the return now, use the AY 2026-27 column below. If you are estimating payroll or advance tax for the current tax year, use the Tax Year 2026-27 column.
| Rule in use | Income period | Cities taking 50% of salary |
|---|---|---|
| AY 2026-27, old Rule 2A | FY 2025-26 | Mumbai, Kolkata, Delhi and Chennai |
| Tax Year 2026-27, Rule 279 | FY 2026-27 | Mumbai, Kolkata, Delhi, Chennai, Hyderabad, Pune, Ahmedabad and Bengaluru |
The department’s new-Act transition FAQ is unusually useful here: it says earlier years remain under the old Act while compliance for the tax year beginning 1 April 2026 proceeds under the new one.
The exemption is the least of three amounts
For the period being calculated, write down:
- the actual HRA received;
- the rent actually paid minus 10% of salary; and
- 50% of salary in a listed city, or 40% anywhere else.
The smallest number is exempt. The remainder of the HRA is taxable salary. If rent minus 10% of salary is negative, treat that limb as nil; paying rent equal to or below 10% of salary produces no exemption.
Take an employee with an annual HRA salary base of ₹7,20,000, HRA of ₹2,88,000 and rent of ₹3,00,000. Assume the employee has no qualifying commission, so that base is basic pay plus qualifying DA. The three limits are ₹2,88,000; ₹3,00,000 minus ₹72,000, or ₹2,28,000; and either ₹3,60,000 at 50% or ₹2,88,000 at 40%. The exemption is therefore ₹2,28,000 in either case, because the rent limb is the smallest. The taxable balance of HRA is ₹60,000.
This is why the city label does not always change the result. It matters only where the percentage-of-salary limb is the one that binds. The HRA calculator shows all three amounts and has a period selector: it applies the four-city list to AY 2026-27/FY 2025-26 and the expanded eight-city list to Tax Year 2026-27.
The salary base depends on the governing rule
Do not put gross salary or CTC into this formula. For FY 2025-26 / AY 2026-27, old Rule 2A uses basic pay, DA that forms part of retirement-benefit salary, and commission fixed as a percentage of turnover achieved by the employee under the employment terms. Other commission remains taxable salary, but it does not enter this older HRA formula merely because payroll calls it commission.
For Tax Year 2026-27, Rule 279 says salary includes DA where the employment terms provide for it and excludes all other allowances and perquisites. Section 16 of the Income-tax Act, 2025 defines salary to include employer fees and commission. The new rule therefore does not support a blanket exclusion of commission merely because it is variable pay. Include a commission component only when it is salary from the employer under section 16, and confirm an unusual component if its legal character is unclear.
In both periods, leave out HRA itself and the allowances or perquisites the governing rule excludes. A larger gross package does not automatically mean a larger HRA exemption; the statutory salary base drives both percentage tests. The HRA calculator asks for that combined base rather than guessing from CTC, and its period note shows which definition to apply.
HRA is an old-regime benefit only
Receiving HRA and being entitled to an exemption are different things. Your employer can pay the allowance under either regime. Under the default new regime, it remains taxable; the exemption is available only under the old regime.
That makes HRA a comparison input, not an automatic saving. Calculate the exemption, add your other old-regime reliefs, and compare the complete tax bills on the income-tax calculator. The old-versus-new regime guide explains why one generous exemption can still be insufficient when the new regime’s wider slabs and rebate are taken into account.
For AY 2026-27, a non-business taxpayer chooses the old regime in the return filed by the due date. What was declared to payroll controls TDS during the year but does not replace the choice made in the return. Business and professional cases follow a separate election process; check the portal rather than borrowing a salaried employee’s workflow.
The eight-city change starts on 1 April 2026
Rule 279 appears on PDF page 244 of the notified Income-tax Rules, 2026, printed Gazette page 1776, with its salary definition continuing onto the following page. Its 50% row names Mumbai, Kolkata, Delhi, Chennai, Hyderabad, Pune, Ahmedabad and Bengaluru; the second row says “Any other place” takes 40%.
The change attaches to Tax Year 2026-27. It does not let a Bengaluru employee revisit FY 2025-26 and use 50% in the AY 2026-27 return. Conversely, continuing to use the old four-city list for salary earned after 1 April 2026 understates the third limb for employees in the four newly added cities.
Gurugram and Noida remain outside both lists. Being in the National Capital Region is not the same as the accommodation being in Delhi. Location follows the residential accommodation for the relevant period, not the employer’s registered office or the city printed on a corporate email signature.
Calculate separately when the year changes
Rule 279 defines the relevant period as the period during which the accommodation was occupied in the tax year. That prevents a year-end salary or address from being projected backwards.
Split the calculation when any input changes: a pay rise, a change in HRA, a rent revision, a move between cities, or a period in which no rent was paid. Work out the least of the three amounts for each period and add the results. The same approach is sensible for AY 2026-27 under the earlier rule.
Keep the payslips, rent agreement, rent receipts and payment trail that support those periods. The return is generally filed without attaching them, but that does not make the evidence optional. If Form 16 carries a different exemption, reconcile the payroll calculation before copying either number into the return; the Form 16, AIS and 26AS guide explains which document can establish which fact.
What to do with the number
First calculate the correct year, city list and salary base. Then ask which of the three limbs binds. If actual HRA binds, more rent cannot raise the exemption. If rent minus 10% binds, each additional rupee of genuine rent raises the exemption until another limit takes over. If the 50% or 40% limb binds, more rent does nothing.
Finally, do not claim the number in isolation. Use it only in an old-regime computation, keep the period-wise evidence, and make sure the year label on the return matches the law used. That three-step check prevents the two expensive 2026 errors: applying the expanded city list one year too early, or applying the old four-city list one year too late.
Common questions
Can I claim HRA exemption under the new tax regime?
No. HRA exemption is available only when you opt out of the default new regime and use the old regime. Your employer may still show HRA as a salary component, but the whole allowance remains taxable under the new regime. Work out the exemption before choosing a regime because a large rent claim can change the comparison; it does not create a deduction after you have chosen the new regime.
Is Bengaluru a metro for HRA in 2026?
The answer depends on the year. For the AY 2026-27 return, which covers FY 2025-26, only Mumbai, Kolkata, Delhi and Chennai take the 50% salary limb. For Tax Year 2026-27 under Rule 279 of the Income-tax Rules, 2026, Bengaluru, Hyderabad, Pune and Ahmedabad join those four cities. The expanded list applies from 1 April 2026; it does not rewrite the earlier year you are filing for.
What salary should I use for the HRA calculation?
Do not enter gross salary or CTC. For FY 2025-26 / AY 2026-27, old Rule 2A uses basic salary, qualifying DA and commission fixed as a percentage of turnover achieved by the employee. For Tax Year 2026-27, Rule 279 includes qualifying DA and excludes other allowances and perquisites, while section 16 of the 2025 Act includes employer fees and commission in salary. If a variable-pay component is hard to classify, confirm its treatment before claiming it.
Do I get an HRA exemption if I pay rent but receive no HRA?
No. The first statutory limit is the HRA actually received, so if that amount is nil the least of the three amounts is nil. Rent paid by itself cannot create an HRA exemption. A separate old-regime deduction may apply to some people who pay rent without receiving HRA, but it has different conditions and should not be folded into the HRA calculation.
Should HRA be calculated separately after a move or salary increase?
Yes. The formula applies to the relevant period for which the accommodation was occupied and the salary and allowance were due. If your basic pay, HRA, rent or city changed during the year, calculate each stable period separately and add the exempt amounts. Applying the final month’s figures to all twelve months can overstate or understate the claim.
Sources
Rates and rules on this page were read directly from the following sources on the dates shown. Figures change — if you are about to act on one, confirm it at the source.