India is a vast nation, and its urban setting comprises diverse cities, each varying in size, economic significance and infrastructure advancement. The classification of Indian cities into Tier I, II, III, and IV offers a general categorisation based on various socio-economic factors. This diverse urban scenario reflects the complex process of urbanisation that has affected India’s economy and geographical structure. It showcases a range of cities with unique characteristics and contributions to the nation’s progress. Now, let’s delve deeper into these stages and explore the intricate layers of urban development that have influenced India’s economic growth and geographical layout.
What is Tier classification of cities in India?
Under tier classification, cities are classified into either of the following categories:
- Urban, Semi-urban and rural
- Population and commercial activities
Numerous factors impact the division of cities into distinct tiers. One important factor is population density, where Tier 1 cities in India have the highest density and Tier IV cities have the lowest. A significant role is also played by economic development, as indicated by variables such as GDP contribution, industrialisation and business activity. Higher-tier cities are distinguished by their presence of cultural and educational institutions, as well as by their development .
The categorisation of tier 1 cities in India followed by tier I, II, III and IV offers an all-encompassing structure for comprehending the heterogeneous urban terrain of the nation. From the thriving metropolises of Tier I to the developing urban centres of Tier IV, each tier symbolises a distinct chapter in the history of urbanisation.Â
These tiers act as a dynamic roadmap, reflecting the constantly changing interactions between infrastructure, economic activity and population, as India continues its journey of urbanisation and economic development. From tier 1 cities in India to Tier II, III and IV cities demonstrate the country’s commitment to inclusive development and considerably boost regional growth, while Tier I cities serve as beacons of progress. As the urban narrative unfolds, the tier classification system remains a valuable tool, offering insights into the complex tapestry of India’s urban fabric.
Classification of cities in India
According to the Seventh Pay Commission, cities in India are classified into three major categories:
- Category X: Known as Tier 1 cities, and earlier known as A1
- Category Y: This category includes all the tier 2 cities, earlier known as B1, B2.
- Category Z: This category comprises tier 3 and tier 4 cities, also referred to as C.
Classification based on population
The Reserve Bank of India (RBI) classifies the cities in India based on the population under six categories:
| Tiers | Population size |
| Tier 1 | 1 lakh and above |
| Tier 2 | 50,000 to 99,999 |
| Tier 3 | 20,000 to 49,999 |
| Tier 4 | 10,000 to 19,999 |
| Tier 5 | 5,000 to 9,999 |
| Tier 6 | Less than 5,000 |
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Purpose of classifying the cities in India
- Urban planning: Classifying the cities into different tiers enables urban planning for authorities and the planning of infrastructure development and resource allocation.
- Administrative purposes: The classification of cities enables government authorities to govern the cities through effective resource allocation.
- Economic assessment: Tier classification enables assessment of a city’s economic potential, which supports investors and businesses to identify the market and business opportunities.
- Quality of life assessment: The classification of cities into different tiers denotes the quality of life and social development. It also helps researchers and policymakers identify areas for improvement.
- Investment considerations: Classifying the cities into tiers enables investors and businesses to identify and assess potential markets based on the consumer base, business environment, purchasing power of the city, etc.
Factors considered for classifying the cities in India
The Indian cities are classified into different tiers to enable authorities to assess their development, infrastructure and economic potential. Several key parameters are considered to understand the growth prospects and investment opportunities in these cities.
- Population: The foremost factor considered when classifying cities is the population. Those with the largest population come under Tier 1 city.
- Urbanisation: The extent of city development and the spread of urban areas are among the key parameters considered when classifying cities.
- Infrastructure: The availability of infrastructure, such as metro, airports, flyovers, top-rated schools, medical facilities, etc., is a key factor based on which cities are classified. Most of these facilities are available in Tier 1 cities. However, Tier 2 witnessed development the development of these facilities.
- Economic development: The economic parameters such as per capita income, employment opportunities and Gross Domestic Product (GDP) are key factors taken into account when classifying cities. Tier 1 cities comprises of the busiest commercial and business hubs. On the other hand, tier 2 have emerging commercial hubs while tier 3 and 4 cities mostly comprises of local businesses catering to the region.Â
- Income levels: The average income of the residents in a city, showing the economic status of the population, is a key factor taken into consideration.
- Government policies: Support from the government in terms of incentives and key initiatives for urban development and growth is also a significant factor.
Implications of the classification of tier cities in India
The classification of cities in India into various tiers has implications in terms of economic opportunities, regional development, infrastructure and employment patterns. Assessing these implications and future prospects enables the government to ensure balanced growth and urban expansion.
Tier 1 cities in India
Established urban centres: Tier 1 cities in India encompass Bangalore, Chennai, Delhi, Hyderabad, Kolkata, Mumbai, Ahmedabad and Pune. These urban hubs are densely populated and highly developed, featuring robust infrastructure like airports, industries, top-notch healthcare, education facilities and bustling commercial areas. They allure professionals with their competitive atmosphere and ample entrepreneurial prospects. These cities are recognised for their elevated cost of living and possess India’s priciest real estate markets.
Real estate impact in Tier 1 cities
Tier 1 cities are the top cities that witness the maximum real estate activities owing to the high demand. As a result, property prices are high in these cities. Owing to the presence of thriving business hubs, good connectivity, well-developed infrastructure and the availability of jobs, these cities witness a strong demand for residential and commercial properties. There is a significant demand for homes for buying and renting.
Tier II cities
Emerging urban centres: Cities like Chandigarh, Ghaziabad, Faridabad, Kochi, Nagpur, Amritsar, Bhopal, Surat, Agra, Kanpur, Bhubaneswar , Surat, Jaipur and Lucknow stand out as major urban centres with notable infrastructural and economic development in the Tier II category. These cities are making their mark by offering a balance between urban amenities and a more reasonable cost of living, even though they do not have the same scale as their Tier I counterparts.
Real estate impact in Tier 2 cities
These cities comprise emerging business and commercial hubs such as IT hubs and startups and witness rapid infrastructure development such as metro and expressways. Owing to the growing number of migrant population and working professionals, there is an increasing demand for properties in these cities. Properties have quite affordable prices compared to Tier 1 cities, but they are steadily rising due to the increasing demand.
Some of the prominent Tier 2 cities include:
- Amritsar
- Bhubaneswar
- Faridabad
- Bhopal
- Chandigarh
- Ghaziabad
- Jaipur
- Lucknow
- Patna
- Kanpur
- Mysore
- Coimbatore
Tier III cities
Growing urban centres: Tier III cities are smaller urban areas that are undergoing gradual economic development. Examples of these cities are Durgapur, Madurai, Bhopal, Coimbatore and Varanasi. They provide a high standard of living, are vital to the development of local industries and frequently act as regional centres for trade and education.
Real estate impact in Tier 3 cities
Compared to tier 1 and tier 2 cities, tier 3 cities have limited facilities in terms of infrastructure and job opportunities. Economic activities comprise mostly of small businesses and local industries. Property prices are relatively lower in these cities.
Some prominent tier 3 cities include:
- Roorkee
- Etawah
- Bhatinda
- Rohtak
- Hosur
- Udaipur
- Jhansi
- Salem
- Madurai
- Vijayawada
- Meerut
- Bikaner
- Cuttack
Tier IV cities
Developing urban centres: Cities like Banswara, Bhuj, Gangtok, Haldia, Saharanpur and Kottayam, which are in Tier IV, are examples of smaller urban areas that have not yet reached the same degree of development as cities in higher tiers. Despite having rudimentary services and infrastructure, they make a substantial contribution to localised economic activity and regional connectivity.
Tier 4 cities comprise of smaller towns or villages, which need major social infrastructural development and funding. The government’s ‘Housing for All’ scheme has led to a significance demand for affordable housing in these cities. Further, several prominent developers have started focusing on city outskirts and satellite towns, catering to this growing demand.
Some prominent tier 4 cities include:
- Banswara
- Bhadreswar  Â
- Bhilwara
- Chilakaluripet    Â
- Chittorgarh
- Datia
- Deoghar
- Dibrugarh
- Gangtok
- Haridwar
- Kalyani
- Kapurthala
- Kasganj
- KarauliÂ
- Munger
- Nagda
- Purnia
- Rewari     Â
- Sujangarh      Â
- Sikar
New metro cities in India
Several cities are being considered for inclusion under the metro city category. However, under the existing income tax laws, only four cities are counted among the metro city category and the other cities have yet to obtain the official status.
For example, if Bangalore is regarded as a metro city, taxpayers in the city will gain a 50% tax exemption on their House Rent Allowance (HRA), similar to other metro cities such as Delhi and Mumbai.
The cities that are being considered for inclusion under the metro city category are:
- Bangalore
- Hyderabad
- Ahmedabad
- Pune
- Surat
- Prayagraj
- Ghaziabad
- Agra
Role of cities in claiming HRA benefit
According to the provision of income tax laws in India under rule 2A of the Income Tax Rules (ITR) 1962, a house rent allowance (HRA) is a salary component on which one can avail of tax benefits. Those living in metros are eligible for a 50% of their basic salary as tax-exempt HRA, while people living in non-metro cities can only claim 40% of their basic salary as tax-exempt HRA. The four metro cities – Delhi, Mumbai, Kolkata and Chennai, are considered for HRA tax calculation. Cities that are part of the National Capital Region (NCR) and Mumbai Metropolitan Region (MMR) are not considered metro cities for HRA tax calculation. Some cities, which are among the largest in size, population and rental value, are not considered for HRA tax calculation and one cannot claim 50% HRA tax exemption that while the rent in these cities are significantly high.
Click to read which are the metro cities in India for HRA calculation?
Top cities in India by GDP
| Cities in India | GDP (in USD) |
| Mumbai | 310 billion |
| Delhi | 293.6 billion |
| Kolkata | 150 billion |
| Bangalore | 110 billion |
| Chennai | 66 billion |
| Hyderabad | 58 billion |
| Pune | 55 billion |
| Ahmedabad | 47 billion |
| Surat | 45 billion |
| Visakhapatnam | 40 billion |
Cities in India are also classified based on the GDP, per capita income, businesses environment and employment opportunities. Some of the top cities in India based on GDP in 2024 have been listed above.
Top 10 most liveable cities in India
| Cities | State | Liveability score |
| Bangalore | Karnataka | 66.7 |
| Pune | Maharashtra | 66.27 |
| Ahmedabad | Gujarat | 64.87 |
| Chennai | Tamil Nadu | 62.61 |
| Surat | Gujarat | 61.73 |
| Navi Mumbai | Maharashtra | 61.6 |
| Coimbatore | Tamil Nadu | 59.72 |
| Vadodara | Gujarat | 59.24 |
| Indore | Madhya Pradesh | 58.58 |
| Greater Mumbai | Maharashtra | 58.23 |
According to the Ease of Living Index 2020, the annual report published by the Ministry of Housing and Urban Affairs (MoHUA), the top 10 livable cities in India in 2024 have been listed above.
Housing.com News Viewpoint
The location is a key factor when purchasing a property. For property buyers, it is important to understand the basic differences between Tier 1, tier 2 and other cities. While Tier 1 cities are mostly saturated and have high property prices, some tier 2 and other cities are emerging as the preferred destination for homebuyers, especially affordable housing.
Understanding the classification of cities, their significance and implications is essential for investors and end-users as it enables them to identify opportunities and make informed decisions when investing in real estate.
FAQs
How is the tier classification determined for cities in India?
Tier classification is determined based on various factors, including population size, economic development, infrastructure and the presence of cultural and educational institutions.
Are Tier I cities the only ones with significant economic activities?
While Tier I cities are the largest and most economically developed, Tier II, III and IV cities also contribute significantly to regional economic growth. Each tier plays a unique role in the country's urban landscape.
Is population size the sole criterion for tier classification?
No, population size is one of several criteria. Economic development, infrastructure and cultural and educational institutions also play crucial roles in determining the tier of a city.
Do Tier II cities offer a better cost of living compared to Tier I cities?
Yes, Tier II cities often offer a better cost of living, striking a balance between urban amenities and affordability. This makes them attractive for businesses and residents alike.
Are Tier III and IV cities less developed in terms of infrastructure?
While Tier III and IV cities may have less advanced infrastructure compared to higher-tier cities, they are gradually developing and efforts are being made to improve amenities and services in these areas.
Can Tier III and IV cities attract investments and industries?
Yes, Tier III and IV cities are increasingly becoming attractive for investments and industries. Government initiatives, improved connectivity and localised economic activities contribute to their growth.
Do Tier IV cities have a role in regional development?
Yes, Tier IV cities play a crucial role in regional development by connecting smaller towns and villages. They contribute to localised economic activities and enhance regional connectivity.
How often are cities reclassified into different tiers?
The reclassification of cities into different tiers is not frequent and depends on sustained changes in factors such as population, economic development and infrastructure. It is typically done after careful evaluation by relevant authorities.
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