The Central Board of Direct Taxes (CBDT) notified the changes on March 20, with implementation set for the new financial year. A key revision widens the list of cities eligible for a higher HRA exemption cap of 50% of basic salary.
So far, the higher exemption applied only to four metros—Mumbai, Delhi, Chennai and Kolkata.
From FY27, Hyderabad, Pune, Ahmedabad and Bengaluru will also qualify, taking the total to eight cities.
The move aligns tax treatment more closely with rising rental costs in major urban centres beyond traditional metros. Salaried individuals living and working in these cities can now claim a larger portion of HRA as tax-exempt, potentially lowering taxable income and increasing take-home pay.
Experts say the revision addresses a long-standing mismatch between rent realities and tax rules.
Ashish Bhutani, CEO of Bhutani Infra, said the change could improve disposable incomes while supporting rental housing demand in expanding urban markets.
E Lakshminarayana Reddy, Founder and CEO of EARA Group, noted that rents in cities such as Bengaluru, Hyderabad and Pune have risen sharply in recent years, often matching metro levels. He said extending higher HRA benefits to these locations could offer some relief to salaried professionals managing higher living costs.
The broader tax framework also combines relief measures with tighter oversight.
Sayantan Kundu, Assistant Professor Finance, IMI Kolkata, said the updated rules aim to reduce the tax burden on the middle class while strengthening compliance through technology and simplifying aspects of investment and corporate taxation.
Alongside HRA changes, the rules provide some support to the old tax regime by enhancing deduction limits for components such as children’s education, hostel allowance and free meals. Overseas spending on education and travel is set to attract lower tax collected at source, while higher securities transaction tax (STT) on futures and options aims to curb speculative trading.
