Income tax HRA: Why Bengaluru is not considered a metro city for taxpayers?

Bengaluru undoubtedly boasts all the characteristics of a modern global metropolis – a booming IT and startup hub, cosmopolitan culture, and premium infrastructure. However, the city strangely does not cut a metro for house rent allowance tax exemptions under income tax laws.

“While Bangalore undeniably shares attributes of other metros like high population density, significant economic activity, and a fast-paced lifestyle, it’s still categorized as a non-metro for HRA purposes. This means residents can only claim 40% of their basic salary as tax-exempt HRA, compared to the 50% allowed in the four designated metros,” said Abhishek Soni, CEO and Co-founder of Tax2win.

“The list of approved metros has not been updated since the early 1990s, thus missing out on Bangalore’s explosive growth in the last three decades,” said Agam Gupta, Exеcutivе Dirеctor, Sharе India Fincap.

Why is Bangalore not considered a metro city in HRA as per the IT Tax Act?

According to Abhishek Soni, this discrepancy in HRA exemption rates is due to an outdated and arbitrary classification of metro cities in the income tax laws, which does not reflect the current reality of urbanization and development in India, because the definition of “metro city” in the Income Tax Act, specifically Rule 2A of the Income Tax Rules, 1962, does not rely on population or contemporary economic factors.

Instead, it’s a static list of only four cities: Delhi, Mumbai, Chennai, and Kolkata. This list hasn’t been updated since the rules were initially drafted, added Soni.

With rental yields crossing 3% and monthly rents averaging 3-4,000 per sq ft for mid-range localities, housing costs now rival Delhi or Mumbai.

“Not classifying Bangalore as a metro ends up penalising lakhs of salaried IT, banking, and other professionals with inflated tax bills. Hopefully, the outdated HRA metro cities list will get a much-needed revision in line with contemporary realities soon,” said Agam Gupta.

Pre-Budget Expectations 2024

Bengaluru to be considered a metro city for HRA exemption is among one of the top expectations from Finance Minister Nirmala Sitharaman’s Union Budget 2024.

Disclaimer: The views and recommendations made above are those of individual analysts, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.




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Published: 06 Jan 2024, 06:19 AM IST

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