The Union government is examining a proposal to extend the higher House Rent Allowance (HRA) exemption cap to fast-growing urban centres including Bengaluru, Hyderabad, Pune and Ahmedabad a move that could alter disposable incomes for thousands of salaried tenants under the old tax regime. If notified, the revision would align these cities with Mumbai, Delhi, Kolkata and Chennai for HRA exemption calculations.
Currently, only the four legacy metros qualify for an exemption ceiling of 50 per cent of Basic plus Dearness Allowance (DA). Other cities are capped at 40 per cent. The proposed change would raise the permissible HRA exemption limit to 50 per cent in the newly included urban centres, reflecting the sharp rise in rental values and wage levels over the past decade. The HRA exemption is calculated using the “least of three” method: actual HRA received, a percentage of Basic plus DA (50 per cent for metros), or rent paid minus 10 per cent of Basic plus DA. By expanding the metro classification, the higher HRA exemption could reduce taxable income for mid- and senior-level employees living in high-demand residential corridors. Tax practitioners indicate that the impact will be most visible among households paying substantial rents in established apartment clusters and transit-linked neighbourhoods. With formal salaries increasingly structured so that Basic plus DA constitutes at least half of total compensation under labour code norms, the revised cap could widen the gap between taxable and exempt income for eligible tenants. For example, professionals earning in the upper tax slabs may see annual savings that meaningfully offset rising housing costs. In cities where three-bedroom apartments in well-serviced communities command premium rents, the higher HRA exemption may translate into improved liquidity.
Financial planners suggest such savings often flow into insurance, long-term investments or education funds channels that support household stability in expensive urban markets. However, the benefit is unlikely to be uniform. Tenants paying relatively modest rents may find that the “rent minus 10 per cent of Basic” formula remains the binding constraint, limiting any incremental relief. The policy, therefore, primarily addresses the segment facing steep rental escalation rather than the broader tenant base. Beyond individual tax planning, the move signals recognition of the evolving economic geography of India’s growth centres. Bengaluru, Hyderabad and Pune, in particular, have emerged as technology and services hubs, while Ahmedabad has seen sustained industrial and infrastructure expansion. Aligning tax treatment with rental realities acknowledges their transition into high-cost metropolitan ecosystems.
If implemented, the higher HRA exemption could subtly reshape household budgets across these cities. In an era where rental affordability intersects with mobility, sustainability and workforce participation, fiscal calibration remains one lever influencing how India’s expanding urban middle class navigates housing costs.
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