Bengaluru's Workforce Set for Major Tax Relief with 50% HRA Exemption
The salaried workforce of Bengaluru is poised to receive substantial tax relief following the draft Income Tax Rules, 2026, which propose placing the city in the category eligible for a 50% House Rent Allowance (HRA) exemption. This significant benefit, previously reserved only for Delhi, Mumbai, Kolkata, and Chennai, would bring Bengaluru on par with these traditional metropolitan centers and raise the deduction ceiling from the current 40%.
Expanded List Includes Major Cities
The expanded list of cities eligible for the higher exemption also includes Hyderabad, Pune, and Ahmedabad. Once officially notified, this change is expected to provide financial relief to lakhs of employees who have been grappling with steep rental costs in India's technology capital.
According to the Income Tax Act of 1961, salaried employees can claim HRA exemption in their salary tax computation. The exempt amount is calculated as the least of three options:
- Actual HRA received
- 40% of basic salary plus dearness allowance (50% for employees working in metropolitan cities)
- Excess of rent paid over 10% of salary
Tangible Financial Benefits for Employees
While the percentage difference might appear modest, it translates into meaningful financial savings for Bengaluru's workforce. Preliminary calculations demonstrate that for an employee with a basic monthly salary of Rs 30,000, the higher exemption limit would increase the exempt amount by Rs 3,000. This adjustment could result in annual tax savings approaching Rs 10,000 for individuals in the 30% tax bracket.
In January 2024, The Times of India initiated a campaign advocating for Bengaluru's inclusion in the list of metropolitan cities that qualify for the additional HRA exemption. Although the new draft rules do not explicitly designate Bengaluru as a "metropolitan city," they have incorporated its name into the list that previously contained only the four established metro cities.
Political Advocacy and Personal Campaign
Bangalore South MP Tejasvi Surya described the development as the culmination of years of persistent representation, calling it a "big bonus" for the city's residents. Surya has been actively campaigning since 2020 to have Bengaluru added to the metropolitan cities list under Income Tax rules.
"Having closely witnessed my father, a regular salaried employee, struggle with HRA deductions, this campaign held personal significance for me," Surya explained to The Times of India. "Bengaluru unquestionably merits inclusion in the list of metros, and I am gratified to have played a role in achieving this outcome. It has required sustained and determined effort."
Policy Reversal and Symbolic Recognition
This decision represents a notable reversal of the Union Finance Ministry's position from just eighteen months earlier. In August 2024, Parliament was informed that adding more cities to the metropolitan list would contradict the government's policy of rationalizing exemptions. That stance had drawn criticism from Karnataka political leaders and industry representatives who argued that the existing rules reflected an outdated perspective on urban India.
Despite being a major contributor to national income tax collections and hosting one of the country's largest salaried populations, Bengaluru had remained excluded from this privileged tax category. The inclusion now carries substantial symbolic weight, as business leaders have long maintained that global investors already regard Bengaluru as a metropolis, even if the tax code did not formally acknowledge this status.
With the implementation of these new rules, Bengaluru finally receives formal recognition that aligns tax policy with its economic significance and the substantial living costs borne by its residents. The draft rules additionally permit higher transport allowances of up to Rs 15,000 for employees with disabilities in the notified cities, further enhancing the financial benefits for specific workforce segments.
