Income Tax Rules 2026: Major HRA Changes

Income Tax Rules 2026: Major HRA Changes Every Salaried Employee Must Know

The Government has released the Draft Income-tax Rules, 2026, introducing important procedural and structural updates for salaried taxpayers claiming House Rent Allowance (HRA).

While the core exemption formula remains intact, the draft proposes significant compliance changes — particularly around mandatory disclosure of landlord relationship and revised city classification for higher exemption limits.

These rules are expected to apply from 1 April 2026 (FY 2026-27 onwards) once notified.

This article provides a complete technical analysis of the proposed HRA changes.

1. Existing HRA Exemption Framework (No Change in Formula)

Under Section 10(13A), HRA exemption continues to be calculated as the least of the following three amounts:

1. Actual HRA received
2. Rent paid minus 10% of salary (Basic + DA forming part of retirement benefits)
3. 50% of salary (metro cities) or 40% of salary (non-metro cities)

The calculation mechanism remains unchanged in the draft rules.

However, the compliance framework around it has been strengthened.

Key Proposed Changes in Draft Income-tax Rules, 2026

2. Mandatory Disclosure of “Relationship with Landlord” (Draft Rule 205)

🔴 This is the most significant compliance change.

Under Draft Rule 205, employees claiming HRA must furnish details in Form No. 124 (proposed replacement for Form 12BB).

The new form requires:

• Name of landlord
• Address of landlord
• PAN of landlord
• Disclosure of relationship with landlord (if any)

This means employees must now explicitly declare if the landlord is:

• Parent
• Spouse
• Sibling
• Relative
• Any other related party

Why This Change?

The tax department intends to:

• Scrutinize “family rental arrangements”
• Use data analytics for cross-verification
• Match rental income declared by landlord
• Identify circular or artificial rent arrangements

Earlier, relationship disclosure was not mandatory. Now it becomes a structured compliance requirement.

3. Consequence of Misreporting

Incorrect disclosure or suppression of relationship may lead to:

• Disallowance of HRA exemption
• Penalty proceedings
• Penalty up to 200% of tax under misreporting provisions (as per the new penalty framework)

The draft removes the defence of “unawareness” once mandatory disclosure is introduced.

4. Expansion of 50% HRA Cities (Structural Benefit)

Historically, only four cities qualified as metro for 50% salary limit:

• Mumbai
• Delhi
• Chennai
• Kolkata

The draft rules propose expanding this category to include:

• Bengaluru
• Hyderabad
• Pune
• Ahmedabad

Impact:

Employees in these cities may now claim HRA exemption up to 50% of salary instead of 40%.

This is a major benefit for salaried professionals in high-rent urban centres.

5. Introduction of Form No. 124 (Compliance Shift)

Form 124 will replace the existing declaration mechanism and may require:

• Digital submission
• Structured landlord information
• Relationship tagging
• Possibly additional verification fields

This moves HRA from a simple declaration model to a data-tracked compliance model.

6. What Has NOT Changed

It is important to clarify:

✔ HRA exemption calculation formula remains same
✔ No change in 10% salary deduction rule
✔ No change in requirement of actual rent payment
✔ Old vs New regime rule remains — HRA is available only under Old Tax Regime

The change is primarily compliance-oriented, not computational.

Practical Implications for Employees

If renting from parents or relatives:

• Ensure a genuine rental agreement exists
• Pay rent through banking channels
• Ensure landlord declares rental income in ITR
• Maintain proper documentation

Artificial arrangements may now be easily traceable through data matching.

Practical Implications for Employers

Employers must:

• Collect updated Form 124
• Verify landlord PAN
• Maintain documentation trail
• Strengthen payroll compliance processes

HR and payroll teams may need system updates before FY 2026-27.

Final Analysis: Compliance Tightening, Not Benefit Removal

The Draft Income-tax Rules, 2026 do not reduce HRA benefits. Instead, they:

✔ Expand metro benefit to more cities
✔ Increase transparency in family rentals
✔ Introduce structured disclosure
✔ Enable data-driven scrutiny

This signals a broader policy shift toward analytics-based compliance and reduced evasion.

Conclusion

The HRA framework under Draft Income-tax Rules, 2026 represents:

• A compliance upgrade
• A transparency push
• A modest structural benefit to additional cities

Salaried taxpayers must prepare for enhanced documentation requirements from FY 2026-27 onwards.

Early awareness will help avoid future disputes and penalties.

Also Read: Consolidated TDS & TCS Guide under Income-tax Act 1961 vs Income-tax Act 2025

Watch with CA Cult

Read More: Union Budget 2026 – CA Cult