The government is considering a change to income-tax rules that could benefit salaried employees living in Bengaluru, Hyderabad, Pune and Ahmedabad. At present, only residents of Mumbai, Delhi, Kolkata, and Chennai can claim up to 50 per cent of their basic salary plus dearness allowance as tax-free house rent allowance (HRA). For all other cities, the exemption is capped at 40 per cent. The draft proposal suggests extending the 50 per cent limit to these four additional cities, putting them on par with the traditional metros.
Tax experts say this move reflects how housing costs have risen sharply in India’s newer technology and business hubs. Rents in parts of Bengaluru and Hyderabad are now similar to those in Chennai, while Ahmedabad and Pune are catching up with Mumbai. Other Tier-II cities such as Jaipur, Chandigarh, and Lucknow are also seeing fast increases in living costs, which is why the government is revisiting rules originally framed in 1962.
However, the actual benefit of this change depends on whether employees choose the old or new tax regime. The old regime allows deductions, including HRA, while the new regime offers lower tax rates but fewer deductions. Experts explain that taxpayers need to calculate a ‘break-even deduction’ to decide. For instance, someone earning Rs 15 lakh per year would benefit from the old regime only if deductions exceed about Rs 5.44 lakh. For an income of Rs 20 lakh, the threshold rises to around Rs 7.08 lakh. This means the new HRA relief could make the old regime more attractive, but mainly for higher earners who already claim large deductions.
It is important to note that these changes are still in draft form. They will only apply once the government issues a final notification. Until then, the current rules remain in place.
