The Central Board of Direct Taxes notified the Income-tax Rules, 2026 on 20 March 2026. They apply from 1 April 2026, alongside the new Income-tax Act, 2025, and change several salary exemptions that payroll teams use every month.
HRA: four more cities at 50%
The HRA exemption is still the lowest of three amounts: HRA received, rent paid minus 10% of salary, and a percentage of salary that depends on the city. What changed is the list of cities that get 50% instead of 40%:
| Tax year | 50% of salary | 40% of salary |
|---|---|---|
| Up to 2025-26 | Delhi, Mumbai, Kolkata, Chennai | Everywhere else |
| From 2026-27 | Delhi, Mumbai, Kolkata, Chennai, Bengaluru, Hyderabad, Pune, Ahmedabad | Everywhere else |
For an employee in one of the four new cities who pays substantial rent, more of their HRA can now be tax-free. See the worked example in our HRA exemption guide.
Employees claiming HRA are also asked to disclose their relationship with the landlord, in addition to the landlord's PAN where the rent is more than ₹1 lakh a year.
Higher limits for other allowances
| Allowance | Earlier limit | From 2026-27 |
|---|---|---|
| Children's education allowance | ₹100 a month per child | ₹3,000 a month per child |
| Children's hostel allowance | ₹300 a month per child | ₹9,000 a month per child |
Reports on the final rules also point to a higher tax-free value for free meals (₹200 a meal, from ₹50) and non-cash gifts (₹15,000 a year, from ₹5,000). Check the notified rules before building these into salary structures.
What payroll teams should do
- Update the HRA city list in your payroll setup for tax year 2026-27.
- Ask employees in Bengaluru, Hyderabad, Pune and Ahmedabad to resubmit rent declarations if needed.
- Collect the landlord relationship along with rent details and PAN.
- Review whether children's education or hostel allowances are worth adding to salary structures for old-regime employees.
Sources
- KPMG — India: Income-tax Rules, 2026 notified kpmg.com
- ClearTax — House Rent Allowance: exemption, calculation and rules cleartax.in
- ClearTax — Income Tax Rules 2026: key changes cleartax.in
Published 28 Sept 2026. This update is general information for HR and payroll teams, not legal or tax advice — confirm with the official source before acting on it.