- The Income-tax Rules, 2026 extend the 50% HRA limit to Mumbai, Delhi, Kolkata, Chennai, Bengaluru, Hyderabad, Pune and Ahmedabad.
- Every other city uses the 40% limit, and HRA exemption is available only under the old tax regime.
- Central government HRA uses a separate X, Y and Z city classification, where X covers the same eight cities.
- No single official list defines “tier 2” for hiring, so each employer sets its own map.
On this page
What is the official meaning of tier 1, 2 and 3?
Two government lists exist, and neither uses the word “tier”.
The first is the tax list. The KPMG alert on the Income-tax Rules, 2026 confirms that Ahmedabad, Bengaluru, Hyderabad and Pune joined the 50% bracket for the house rent allowance exemption. Before that, only Mumbai, Delhi, Kolkata and Chennai qualified.
The second is the X, Y and Z grid used for central government HRA. X class covers the same eight cities. Y class covers roughly a hundred smaller cities, including Coimbatore, Kochi, Indore, Jaipur, Nagpur and Lucknow. Z is everywhere else.
Hiring talk is looser. Tier 1 usually means the X cities, tier 2 cities in India are the Y cities with tech or services clusters, and tier 3 cities india means smaller towns.
How much does the city change take-home pay?
A lot, for staff on the old regime who rent.
Let’s say two engineers each earn basic of ₹50,000 a month, HRA of ₹25,000 and pay rent of ₹30,000, one in Pune and one in Coimbatore. The exemption is the lowest of three tests.
| Test | Pune (50% city) | Coimbatore (40% city) |
|---|---|---|
| Actual HRA | ₹25,000 | ₹25,000 |
| Rent minus 10% of basic | ₹25,000 | ₹25,000 |
| 50% or 40% of basic | ₹25,000 | ₹20,000 |
| Exempt HRA a year | ₹3,00,000 | ₹2,40,000 |
So the Pune engineer shields ₹60,000 more a year from tax. Same job, same rent, different city. Before April 2026 both would have used 40%. That gap matters when you run salary benchmarking across cities, since a smaller gross can buy the same take-home in a 50% city.
Why are employers hiring in tier 2 cities?
Talent pools, cheaper offices and less poaching. The cost is depth.
Pune, Hyderabad and Bengaluru now count as top-tier for tax. But many firms and global capability centres now add teams in Coimbatore, Kochi, Indore and Jaipur. Our analysis of GCC hubs in India maps where they cluster.
Under an EOR, a second city needs no new entity. Just local filings, such as Professional Tax. Your talent acquisition plan sets the pay band.
How does Remunance support hiring across Indian city tiers?
Remunance has placed 1,200+ employees for clients across 34 Indian cities, from metro hubs to tier 2 tech clusters. We register each state’s Professional Tax, Labour Welfare Fund and Shops and Establishments filings as your team spreads, and apply the right HRA city limit in payroll. See how six cities made India the GCC capital, then map your India hiring cities with our team.
What else do people ask about tier 2 cities in India?
Is Pune a tier 1 or tier 2 city?
For HRA tax purposes, Pune is now in the top bracket, with the 50% limit from April 2026. Many hiring teams still call it tier 1 for tech talent.
Which are the X, Y and Z cities for HRA?
X covers Mumbai, Delhi, Kolkata, Chennai, Bengaluru, Hyderabad, Pune and Ahmedabad. Y covers about a hundred mid-sized cities, and Z covers the rest.
Does the new tax regime use the city list?
No. HRA exemption is unavailable under the new regime, so the city list only matters for employees who choose the old regime.
Planning a hire in India?
Our founding team has run payroll and hiring in India for 22+ years, first as Remunance Systems, which was later acquired by ADP.