The Centre has issued the Income Tax Rules, 2026, with the applicable taxation guidelines beginning on April 1 in accordance with the Income-tax Act of 2025. The new rules must be followed by taxpayers when submitting their annual tax returns by July 31.
One of the key changes for salaried taxpayers claiming HRA is the addition of cities to the list of eligible high-HRA-exemption-limit cities. Previously, this list was restricted to a very small number of metropolitan areas; now it includes eight cities - Mumbai, Kolkata, Delhi, Chennai, Hyderabad, Pune, Ahmedabad and Bangalore.
The reason for adding these additional cities to the list of eligible cities for HRA exemption is due to rental prices continuously increasing in large urban centres, therefore allowing taxpayers to qualify for a higher exemption.
The addition of these new cities to the longer list of eligible cities for HRA exemption means that many more taxpayers will be able to benefit from the higher tax benefit as well.
The HRA Exemption will be the lowest of the following:
- HRA actually received
- Rent paid - 10 per cent of Salary;
- 50 per cent of salaried taxable income or 40 per cent of salaried taxable income for non-listed cities.
A new significant compliance obligation is also created by the introduction of Form 124. Any employee who claims HRA must disclose the relationship that exists between the employee and the landlord, where the landlord is related to him/her, and when the employee pays rent to a related landlord.
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Before the new law, most taxpayers submitted receipts of their rent payments along with the PAN of their landlords. With the new law, there is increased transparency through the requirement for landlords to disclose their relationships to tenants.
Tenants can still pay rent to relatives, but must identify the relationship when filing taxes and ensure that their landlords report rental income on their tax returns. The purpose of these changes is to reduce the potential for fraudulent HRA claims and to assist tax authorities with their validation process.