The Central Board of Direct Taxes (CBDT) has significantly expanded the list of metro cities for House Rent Allowance (HRA) purposes, adding Bengaluru, Hyderabad, Pune, and Ahmedabad to the existing list of Delhi, Mumbai, Kolkata, and Chennai. According to reports from Mint, this change allows eligible salaried employees in these cities to claim a higher HRA exemption under the Old Tax Regime. The HRA exemption is calculated as the least of the following: actual HRA received, rent paid minus 10% of salary, or 50% of salary for metro cities (40% for non-metro cities).
The key difference between the old and new rules is that employees residing in the newly added metro cities can now use 50% of salary instead of 40% while calculating HRA exemption. As reported by Mint, this may result in a larger portion of HRA becoming tax-free for taxpayers in these cities. HRA exemption is available only under the Old Tax Regime, making it crucial for employees to verify their tax regime selection before claiming HRA benefits. However, recent developments show that the Income Tax Department has identified 15,000-20,000 cases where individuals have used 'swapped provisions' tricks to unfairly reduce their tax liability, including manipulating HRA claims.
Before claiming HRA, taxpayers must ensure they maintain proper documentation and meet specific conditions. According to Mint, taxpayers should have opted for the Old Tax Regime, maintain rent receipts and a valid rent agreement, obtain the landlord's PAN if annual rent exceeds ₹1 lakh, and keep proof of rent payments such as bank transfers or UPI records. Additionally, taxpayers must verify that HRA details are correctly reflected in Form 16 to ensure proper tax benefit calculation. Recent tax department guidance emphasizes that HRA exemption under Section 10(13A) is linked to actual rent payment, receipt of HRA as part of salary and satisfaction of the prescribed computation mechanism, while Section 10(14) applies only to specified allowances for particular expenses.
The revised HRA rules provide higher tax savings for employees living in Bengaluru, Hyderabad, Pune, and Ahmedabad. As reported by Mint, a larger HRA exemption reduces taxable income, lowering overall tax liability for eligible taxpayers. However, recent developments show that incorrect claims may result in penalties of up to 200% of tax payable under Section 439 of Income Tax Act, 2025, in addition to tax and interest. Tax experts advise that taxpayers should claim only those exemptions and deductions for which they are legally eligible and for which adequate supporting documents are available. The tax department increasingly relies on data analytics, Form 16 disclosures, and employer-reported salary break-ups to identify inconsistencies.
