Which cities use 40%?
For FY 2026-27, only eight cities get the 50% limit: Mumbai, Delhi, Kolkata, Chennai, Bengaluru, Hyderabad, Pune and Ahmedabad. Everywhere else uses 40% — including large cities like Jaipur, Lucknow, Kochi, Chandigarh, Indore, Coimbatore, and the suburbs of Delhi such as Gurugram and Noida, which are outside the city of Delhi itself.
Worked example
Basic pay ₹30,000 a month (no DA), HRA ₹12,000, rent ₹12,000, for the whole year, old regime:
| Test (for 12 months) | Amount |
|---|---|
| 1. Actual HRA received | ₹1,44,000 |
| 2. Rent paid ₹1,44,000 − 10% of salary ₹36,000 | ₹1,08,000 |
| 3. 40% of salary ₹3,60,000 | ₹1,44,000 |
| Tax-free HRA = the lowest | ₹1,08,000 |
The lowest is test 2: ₹1,08,000 is tax-free (₹9,000 a month), and ₹36,000 is taxable. At the 20% slab plus cess, that saves you about ₹22,464 a year.
Notice that test 3 (40% of salary, ₹1,44,000) was not the limit here. The 40% versus 50% question only matters when your rent is high compared with your salary.
More examples, 40% cities (full year)
| Basic | HRA | Rent | Tax-free HRA | Taxable HRA |
|---|---|---|---|---|
| ₹20,000 | ₹8,000 | ₹8,000 | ₹72,000 | ₹24,000 |
| ₹25,000 | ₹10,000 | ₹10,000 | ₹90,000 | ₹30,000 |
| ₹30,000 | ₹12,000 | ₹12,000 | ₹1,08,000 | ₹36,000 |
| ₹30,000 | ₹12,000 | ₹15,000 | ₹1,44,000 | ₹0 |
| ₹40,000 | ₹16,000 | ₹18,000 | ₹1,68,000 | ₹24,000 |
| ₹50,000 | ₹20,000 | ₹20,000 | ₹1,80,000 | ₹60,000 |
Does a bigger HRA component help?
If you are discussing a new offer, you may wonder whether asking for more HRA and less special allowance saves tax. It can, but only up to a point: the exemption is still limited by your rent minus 10% of salary and by 40% of salary. In the example, raising HRA above ₹12,000 a month would not add a rupee of exemption, because test 2 is already the lowest.
Friendly tips
- Rent below 10% of salary? Then test 2 is zero and no HRA is exempt. Make sure your rent really is more than one-tenth of your basic + DA.
- Renting from parents can be allowed if they own the home, you actually pay the rent (ideally by bank transfer), and they show it as income in their own return. From FY 2026-27, Form 124 asks you to state your relationship with the landlord.
- Living in your own house? You cannot claim HRA for a home you live in that you own. If you own a home in another city and rent where you work, you can generally claim HRA for the rented home.
- Not getting HRA from your employer? In the old regime, a separate, smaller deduction for rent paid (section 80GG of the 1961 Act, which continues as a rent deduction under the Income-tax Act, 2025) may still help.
- Living with family without paying rent? Then the whole HRA is taxable. That is normal and nothing to worry about; the calculator will simply show ₹0 exempt.
FAQ
Is HRA 40% or 50% in my city?
50% only in Mumbai, Delhi, Kolkata, Chennai, Bengaluru, Hyderabad, Pune and Ahmedabad (from FY 2026-27). Every other place uses 40%.
How much HRA is exempt with ₹30,000 basic, ₹12,000 HRA and ₹12,000 rent in a 40% city?
The lowest of ₹1,44,000 (HRA), ₹1,44,000 − ₹36,000 = ₹1,08,000 (rent minus 10% of salary) and ₹1,44,000 (40% of salary): ₹1,08,000 a year.
Are Gurugram and Noida 50% cities for HRA?
No. The 50% limit applies to Delhi itself. Gurugram (Haryana) and Noida (Uttar Pradesh) use the 40% limit.
Sources (checked 5 Nov 2026): Rule 279, Income-tax Rules, 2026 (incometaxindia.gov.in/w/rule-279-1); Income-tax Act, 2025 Schedule III Table Sl. No. 11; CBDT notification of the Income-tax Rules, 2026 dated 20 Mar 2026, in force 1 Apr 2026; Income-tax Act, 1961 s.10(13A) and Rule 2A (FY 2025-26). Cross-checked with ThePrint, Upstox and Mondaq reports on the final rules.