Does Opting for the New Tax Regime Affect HRA Benefits?
The introduction of the new tax regime (Section 115BAC) was aimed at simplifying tax calculations and offering lower tax rates. However, this shift also meant the removal of various deductions and exemptions, including House Rent Allowance (HRA), which was one of the most widely claimed benefits by salaried employees living in rented accommodation.
For employees receiving HRA as part of their salary, this change raises critical questions: Should you opt for the new tax regime? How much tax will you save or lose? Are there alternative ways to reduce taxable income? This blog addresses all these concerns and helps you determine the best financial strategy for your situation.
Table of content
Overview of the New Tax Regime (Section 115BAC)
Key Features of the New Tax Regime
Lower Tax Rates: A new set of concessional tax slabs.
No Exemptions & Deductions: HRA, 80C, 80D, and other common deductions are not allowed.
Higher Standard Deduction: Salaried individuals get a flat ₹75,000 deduction.
Annual Choice: Individuals can opt for either regime every year before filing their Income Tax Return (ITR).
New Tax Slabs for FY 2024-25
Income Range (INR) | Tax Rate (%) |
Up to 3,00,000 | Nil |
3,00,001 - 7,00,000 | 5 |
7,00,001 - 10,00,000 | 10 |
10,00,001 - 12,00,000 | 15 |
12,00,001 - 15,00,000 | 20 |
Above 15,00,000 | 30 |
What is House Rent Allowance (HRA)?
Importance of HRA for Taxpayers
HRA is a salary component provided to salaried employees to help cover rent expenses. Under the old tax regime, HRA significantly reduced taxable income, making it a popular deduction. Many taxpayers, especially those residing in metro cities where rent is high, benefitted from HRA exemptions as it helped lower their effective tax liability.
How HRA Exemption Works (Old Tax Regime)
The exemption amount is determined by taking the lowest of the following three amounts:
Actual HRA received from the employer.
50% of salary (for those living in metro cities) or 40% of salary (for those living in non-metro cities).
Actual rent paid minus 10% of salary.
For example, if an employee’s salary is ₹10,00,000, and they receive an HRA of ₹3,00,000 while paying an annual rent of ₹4,00,000, their HRA exemption would be calculated as follows:
Description | Amount (INR) |
Actual HRA received | 3,00,000 |
50% of salary (metro city) | 5,00,000 |
Rent paid - 10% of salary | (4,00,000 - 1,00,000) = 3,00,000 |
HRA Exemption | ₹3,00,000 |
In this case, the entire HRA received would be tax-exempt under the old regime.
Does the New Tax Regime Allow HRA Benefits?
No, HRA exemption is completely removed under the new tax regime. Even if an employee receives HRA as part of their salary, it is fully taxable under the new regime.
This is because Section 115BAC does not allow any deductions under Section 10(13A), which previously exempted HRA in the old regime. Without the benefit of HRA, individuals renting accommodations need to find alternative ways to save on taxes.
How the Removal of HRA Affects Taxpayers
Who Will Be Most Affected?
High-Rent Payers: If you live in a metro city and pay substantial rent, losing HRA can increase your tax burden significantly.
Mid-Income Salaried Employees: Those in the ₹7-15 lakh range who previously saved tax through HRA may now find the new regime less beneficial as their taxable income increases.
Employees with Minimal Other Deductions: If you have no other major tax-saving investments, the removal of HRA directly increases your tax liability.
For those who primarily relied on HRA as a tax-saving tool, the shift to the new tax regime could lead to higher taxes, unless other benefits like lower slab rates compensate for the loss.
Alternative Tax-Saving Strategies for Renters
1. Increased Standard Deduction Benefit
The new tax regime offers a higher Standard Deduction of ₹75,000, which helps reduce taxable income. While it does not fully compensate for the loss of HRA, it provides some relief.
2. 80GG Deduction for Self-Employed Renters
Individuals who don’t receive HRA but pay rent can claim a deduction under Section 80GG. This deduction is subject to conditions and a maximum limit, making it less beneficial than HRA but still useful for self-employed individuals.
3. Employer Benefits & Salary Restructuring
Employees can negotiate with their employers to restructure their salary to allocate more towards basic salary or EPF contributions, which remain tax-exempt.
For renters, the best approach is to compare the tax liability in both regimes and choose the most beneficial option.
Tax Payable Comparison: Old vs. New Tax Regime
Scenario 1: Salaried Individual Paying Rent
Description | Old Tax Regime (INR) | New Tax Regime (INR) |
Gross Salary | 12,00,000 | 12,00,000 |
Standard Deduction | -50,000 | -75,000 |
HRA Exemption | -2,40,000 | 0 |
Taxable Income | 9,10,000 | 11,25,000 |
Tax Payable | 94,500 | 52,500 |
Scenario 2: Salaried Individual Owning a House
Description | Old Tax Regime (INR) | New Tax Regime (INR) |
Gross Salary | 12,00,000 | 12,00,000 |
Standard Deduction | -50,000 | -75,000 |
Taxable Income | 11,50,000 | 11,25,000 |
Tax Payable | 1,12,500 | 52,500 |
Should Renters Opt for the New Tax Regime?
Renters who previously benefited from HRA exemptions may find the new tax regime less favorable. Without HRA, taxable income increases, leading to higher tax payments. However, individuals without major deductions or exemptions may still benefit from the lower tax rates and higher standard deduction under the new tax regime.
Before making a decision, taxpayers should calculate their effective tax liability under both regimes to see which option provides the best savings.
Expert Opinions on Choosing the Right Tax Regime
Key Takeaways from Financial Experts:
Assess Tax Liability Before Deciding: Compare both regimes using online tax calculators or consult a tax professional.
Consider Long-Term Benefits: While the old tax regime offers more deductions, the new regime provides simplified filing and potentially lower tax rates.
Restructure Salary Smartly: Employees should negotiate with their employers to optimize tax benefits, such as increasing EPF contributions instead of relying solely on HRA.
Experts generally recommend that renters who claim high HRA should stick to the old regime, while those with minimal deductions should explore the benefits of the new tax regime.
Conclusion
The decision to opt for the new or old tax regime depends on individual salary structures, deductions, and financial goals. If you are a renter and rely heavily on HRA to save taxes, the old tax regime remains beneficial. However, if you do not claim major deductions, the new regime’s lower tax rates and increased standard deduction may work in your favor.
Taxpayers should compare tax liabilities under both regimes before making a choice each financial year.
FAQs
1. Can I claim HRA under the new tax regime?
No, the new tax regime does not allow HRA exemption. If you opt for the new tax regime, the entire House Rent Allowance received from your employer will be added to your taxable income and taxed as per the applicable slab rates.
2. Can I switch between tax regimes every year?
Yes, salaried individuals can choose their preferred tax regime each financial year before filing their Income Tax Return (ITR). However, those with business income can switch only once in their lifetime.
3. Is the new tax regime better for those with no deductions?
Yes, individuals who do not claim deductions like HRA, 80C (investments in PPF, EPF, LIC), or 80D (medical insurance) may find the new regime’s lower tax rates more beneficial. It simplifies tax filing and may result in lower overall tax liability.
4. Can I claim rent deductions under the new tax regime?
No, rent deductions such as HRA (under Section 10(13A)) and Section 80GG for those not receiving HRA are not available under the new tax regime.
5. Who benefits most from the new tax regime?
Individuals who:
Have a simple salary structure with minimal allowances.
Do not invest in tax-saving instruments under Section 80C.
Earn an annual income below ₹15 lakh.
Prefer a hassle-free tax filing process with lower documentation requirements.
6. How does salary restructuring help offset HRA loss?
Employees can negotiate with their employers to optimize their salary structure in the following ways:
Increase Basic Salary, which leads to higher EPF contributions (which remain tax-free under Section 80C in the old regime).
Avail employer contributions towards NPS (National Pension System), which can still be partially tax-exempt.
Opt for tax-free meal allowances, fuel reimbursements, or telephone reimbursements as part of their salary package.
7. Does the new tax regime allow the standard deduction?
Yes, the Standard Deduction has been increased to ₹75,000 under the new tax regime for salaried individuals and pensioners.
8. What happens if my salary structure includes HRA but I choose the new regime?
If you opt for the new tax regime, the HRA component in your salary will become fully taxable, as the exemption available under the old regime will not apply. This can significantly increase your taxable income if you previously relied on HRA to reduce tax liability.
9. Is it better for homeowners to opt for the new tax regime?
If a homeowner does not claim interest deductions on home loans (Section 24b), the new tax regime may be a better option due to its lower tax rates. However, if they claim home loan interest deductions, the old tax regime may be more beneficial.
10. Can self-employed individuals benefit from HRA?
No, HRA is applicable only to salaried individuals receiving HRA as part of their salary structure. However, self-employed individuals who pay rent for accommodation can claim a deduction under Section 80GG in the old tax regime.
11. What should taxpayers consider before switching regimes?
Taxpayers should evaluate the following before choosing between the old and new tax regimes:
HRA exemption: If you rely on HRA, the old tax regime may be more beneficial.
Investment in tax-saving schemes: If you invest in PPF, ELSS, EPF, or LIC, you may prefer the old regime.
Medical insurance and home loan deductions: If you claim deductions under 80D (health insurance) or 24(b) (home loan interest), the old regime is likely better.
Annual tax liability comparison: Using an online tax calculator can help determine the best option for your income level and deductions.
12. Will the government remove the old tax regime in the future?
While there is no official confirmation, the government is actively promoting the new tax regime by increasing standard deductions and simplifying tax calculations. Taxpayers are being encouraged to shift towards the new structure, but for now, both regimes continue to exist.
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