Can Salaried Employees Claim HRA in the New Tax Regime?
The introduction of the new tax regime brought significant changes to how salaried employees manage their tax liabilities. One of the biggest impacts is the removal of several exemptions and deductions, including the popular House Rent Allowance (HRA). For years, HRA has been a key tax-saving tool for salaried employees who pay rent. However, with the new tax regime offering lower tax rates in exchange for the elimination of exemptions, many are left wondering whether they can still benefit from HRA.
In this article, we will analyze whether salaried employees can claim HRA in the new tax regime, how its removal affects their overall tax burden, and what alternative strategies can help minimize taxable income.
Table of Contents
What is House Rent Allowance (HRA)?
House Rent Allowance (HRA) is a salary component provided by employers to help employees cover rental expenses. Under the old tax regime, HRA provided significant tax relief as it could be partially or fully exempted from taxable income. However, eligibility for exemption depended on factors such as:
Basic salary
Rent paid
Location (metro cities receive higher exemptions than non-metro cities)
The removal of HRA deductions in the new tax regime has led to significant changes in tax planning for salaried individuals.
Can Salaried Employees Claim HRA in the New Tax Regime?
The short answer is No. HRA exemption is not available under the new tax regime. Unlike the old regime, where employees could claim an exemption under Section 10(13A) of the Income Tax Act, the new tax regime has eliminated this provision entirely. As a result, the entire HRA component of an employee’s salary becomes fully taxable.
HRA Taxation: Old vs. New Tax Regime
Old Tax Regime
Under the old tax regime, the HRA exemption was calculated as the least of the following three amounts:
Actual HRA received from the employer.
50% of basic salary (for metro cities) or 40% (for non-metro cities).
Rent paid minus 10% of the basic salary.
Example Calculation:
Basic Salary: ₹50,000 per month
HRA Received: ₹20,000 per month
Rent Paid: ₹18,000 per month
Location: Mumbai (Metro City)
HRA Exemption Calculation:
Actual HRA received: ₹20,000
50% of Basic Salary: ₹25,000
Rent Paid - 10% of Basic Salary: ₹18,000 - ₹5,000 = ₹13,000
HRA Exempted: ₹13,000 (least of the three values)
Taxable HRA: ₹7,000 per month
New Tax Regime
Under the new tax regime, HRA exemption is not available, meaning the entire HRA component is taxable. This results in higher taxable income for employees who previously relied on HRA exemptions to lower their tax burden.
Why Was HRA Removed in the New Tax Regime?
The government’s objective with the new tax regime was to simplify tax filing and offer lower tax rates in exchange for the removal of exemptions and deductions. The idea was to eliminate complex documentation and reduce compliance burdens. However, this also means that salaried employees lose out on tax benefits that significantly reduced their taxable income under the old regime.
Alternative Tax-Saving Options Under the New Tax Regime
Since HRA exemption is not available in the new tax regime, salaried employees may explore the following tax-saving options:
Standard Deduction of ₹75,000 (recently increased from ₹50,000).
Employer’s contribution to NPS under Section 80CCD(2).
Tax-free perquisites like food allowance and transport allowance.
Lower tax slabs compared to the old tax regime, making it beneficial for those without deductions.
Should You Opt for the Old or New Tax Regime?
Choosing between the old and new tax regimes depends on individual tax-saving needs. If an employee has significant exemptions like HRA, home loan interest, and 80C deductions, the old tax regime may be more beneficial. However, if deductions are minimal, the new regime’s lower tax rates may offer more savings. Refer to the below chart for easy understanding for FY 2024-2025:
Expert Opinions on Tax Planning Without HRA
With the removal of House Rent Allowance (HRA) exemptions under the new tax regime, taxpayers need to explore alternative ways to optimize their tax liability. Tax experts suggest restructuring salary components and leveraging tax-saving avenues to mitigate the impact. Here are some key strategies:
Salary Restructuring:
Employees can negotiate with their employers to include tax-free allowances like meal coupons, leave travel allowance (LTA), and reimbursement for professional expenses.
Opting for flexible benefit plans (FBP) can help in customizing salary components to maximize tax savings.
Employer-Provided Benefits:
Many companies offer health insurance premium coverage for employees and their families. This not only provides financial security but also enables tax benefits under Section 80D.
EPF (Employees’ Provident Fund) contributions remain a tax-saving tool under the new regime. Employees should ensure they are maximizing their EPF contributions.
National Pension System (NPS):
Employees can contribute to the Tier I NPS account, which qualifies for additional tax benefits under Section 80CCD(1B) (up to ₹50,000).
If the employer contributes to the NPS on behalf of the employee, it qualifies for tax deductions under Section 80CCD(2), without any upper limit, making it a tax-efficient salary component.
Other Investment-Based Tax Benefits:
While deductions under Sections 80C, 80D, and HRA are not applicable under the new regime, investments in government-backed schemes like PPF, SSY, and life insurance remain useful for financial security and long-term growth.
Employers may also offer gratuity and voluntary retirement benefits, which can help employees reduce taxable income at a later stage.
Tax experts emphasize that tax planning should be personalized. Individuals should compare their tax liabilities under both the old and new tax regimes before making a decision.
Common Myths About HRA in the New Tax Regime
Many taxpayers are still unsure about how the new tax regime impacts House Rent Allowance (HRA). Let’s bust some common myths:
Myth 1: “HRA is still partially exempt under the new tax regime” → False
Reality: Under the new tax regime, HRA is fully taxable. Unlike the old regime, where HRA was deductible under Section 10(13A), the new regime does not allow any such exemptions. This means that even if an employee receives an HRA component in their salary, they cannot claim tax benefits on it.
What can you do instead?If you are opting for the new regime, focus on employer-provided benefits like NPS, EPF, and health insurance coverage to optimize tax savings.
Myth 2: “The new tax regime is always better than the old regime” → False
Reality: The new tax regime is not universally better. It depends on an individual’s salary structure and deductions.
If you have significant deductions (HRA, 80C, 80D, home loan interest, etc.), the old regime may be more beneficial because it allows you to claim tax exemptions and deductions.
If you do not claim many deductions, the new regime’s lower tax rates might result in lower tax liability.
How to decide?Use the income tax calculator to compare tax liabilities under both regimes before making a choice. Employers also allow employees to switch regimes at the beginning of the financial year.
Conclusion
Salaried employees cannot claim HRA in the new tax regime, making it crucial to reassess tax-saving strategies. While the new regime offers simplicity and lower tax rates, individuals who benefit from deductions like HRA may find the old regime more suitable. Employees should evaluate their taxable income under both regimes before making a choice.
FAQs
Q1. Can I claim HRA under the new tax regime?
No, HRA exemption is not available in the new tax regime. The entire HRA component is added to your taxable income and taxed as per your applicable slab rate. This differs from the old regime, where HRA was partially or fully exempt depending on rent paid, salary, and city of residence.
Q2. Is there any workaround to save tax on rent under the new regime?
No direct exemptions exist for rent payments under the new tax regime. However, employees can negotiate with their employer to restructure their salary to include other tax-efficient components like food coupons, travel allowances, or employer-provided accommodation, which may help reduce overall tax liability.
Q3. How does the removal of HRA affect salaried employees?
The removal of HRA exemption increases taxable income, leading to higher tax liabilities for those who previously benefited from HRA deductions. Employees paying high rent may find the old tax regime more advantageous if they can claim HRA along with other deductions.
Q4. What is the biggest benefit of the new tax regime despite losing HRA?
The primary benefit of the new tax regime is lower tax rates and simplified compliance. Employees who do not have major deductions, such as HRA, home loan interest, or 80C investments, may find the new regime more convenient as it eliminates the need to track multiple exemptions and deductions.
Q5. Can I switch between the old and new tax regimes every year?
Yes, salaried employees can switch between the old and new tax regimes each financial year while filing their income tax return. However, individuals with business income who opt for the new tax regime must continue with it and cannot switch back to the old regime unless certain conditions are met.
Q6. What tax-saving options exist for tenants in the new regime?
Apart from the standard deduction of ₹75,000, no specific tax benefits exist for tenants in the new tax regime. However, salaried employees can explore employer-provided rent-free accommodation, which is taxed at a lower perquisite value, offering some relief.
Q7. Will the government bring back HRA exemption in the new tax regime?
As of now, there is no indication that HRA exemption will be reinstated under the new tax regime. The government’s focus is on a simplified tax structure without deductions and exemptions.
Q8. How does the standard deduction compare to HRA exemption?
The standard deduction of ₹75,000 applies to all salaried employees, regardless of expenses incurred, whereas HRA exemption is based on actual rent paid, basic salary, and city of residence. Employees who paid high rent previously benefited more under the old regime than they would with just the standard deduction in the new regime.
Q9. What happens if my salary includes HRA but I choose the new tax regime?
If your salary includes an HRA component but you opt for the new tax regime, the entire HRA amount will be added to your taxable income and taxed as per your applicable slab rate. There will be no exemption available on HRA under the new regime.
Q10. Can I claim both HRA and home loan deductions under the new tax regime?
No, both HRA exemption and home loan interest deduction under Section 24(b) are not available under the new tax regime. If you have a home loan and pay rent, you may find the old tax regime more beneficial due to the deductions it offers.
Q11. How does the removal of HRA impact employees living in metro cities?
Employees living in metro cities, where rent is generally higher, may experience a greater increase in taxable income since they lose the benefit of HRA exemption. This makes it important for such employees to carefully evaluate whether the new tax regime offers them any net savings.
Q12. If I pay rent to my parents, can I claim HRA in the new tax regime?
No, HRA cannot be claimed under the new tax regime, regardless of whom the rent is paid to. In the old tax regime, if proper documentation was maintained (such as a rental agreement and bank transactions), employees could claim HRA for rent paid to their parents.
Q13. Is employer-provided accommodation still beneficial under the new tax regime?
Yes, employer-provided accommodation is taxed as a perquisite at a concessional rate, which could be lower than the actual rent paid by the employee. This can still be a viable option for reducing tax liability, even under the new tax regime.
Q14. Which tax regime is better for someone earning ₹10 lakh per year?
For an individual earning ₹10 lakh, the choice between the old and new regimes depends on their deductions. If they claim deductions exceeding ₹2 lakh (including HRA, 80C, and home loan interest), the old regime is likely better. If they have minimal deductions, the new regime’s lower slab rates may result in lower tax liability.
Q15. Can LTA (Leave Travel Allowance) be claimed under the new tax regime?
No, LTA exemption is also not available in the new tax regime. Previously, under the old regime, employees could claim LTA for domestic travel expenses incurred for themselves and their family members twice in a block of four years.
Q16. What should I consider before choosing the new tax regime?
Before opting for the new tax regime, consider:
Your annual income and taxable salary components.
The deductions you are eligible for under the old regime.
Your total tax liability under both regimes. Using an online tax calculator can help determine which regime will save you more tax.
Q17. Is the new tax regime beneficial for all salaried employees?
No, the new tax regime is beneficial for those with minimal deductions. If you have high expenses related to rent, home loans, insurance, or investments under 80C, you might save more tax under the old regime.
Q18. Can I claim deductions for health insurance under the new tax regime?
No, deductions under Section 80D for health insurance premiums are not available under the new tax regime. If you rely on such deductions to reduce your taxable income, the old regime may be a better choice.
Q19. Will tax-saving investments like PPF and EPF still provide benefits in the new tax regime?
No, investments in PPF, EPF, and other 80C instruments do not provide any tax benefits under the new tax regime. However, these remain good long-term savings options for wealth creation and retirement planning.
Q20. What happens if I make a mistake while choosing my tax regime?
If you mistakenly choose the new tax regime but later realize that the old regime would have been more beneficial, you can switch back while filing your income tax return (ITR). However, those with business income must be more careful, as switching back may not always be allowed.
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