HRA and LTA Tax Benefits Comparison for FY 2024-25
House Rent Allowance (HRA) and Leave Travel Allowance (LTA) are two key components of a salaried individual’s compensation package that provide tax-saving benefits under the old tax regime. However, under the new tax regime, both exemptions have been removed, which has significant implications for taxpayers. This article compares the tax treatment of HRA and LTA, helping individuals make an informed choice about their tax-saving strategies.
Table of Contents
Understanding HRA and LTA
House Rent Allowance (HRA)
HRA is a component of a salaried employee’s salary that provides tax exemption if they live in rented accommodation. The amount of exemption depends on factors such as salary, rent paid, and city of residence (metro or non-metro). Additionally, HRA can only be claimed if the employee actually pays rent, and proper rent receipts must be submitted as proof.
In metro cities, HRA exemption is higher (50% of basic salary) compared to non-metro cities (40% of basic salary). Furthermore, employees living with their parents and paying rent to them can also claim HRA, provided that proper documentation, such as a rent agreement and bank transfers, is maintained.
Leave Travel Allowance (LTA)
LTA is a tax-free allowance given to employees to cover travel expenses for trips within India. Under the old tax regime, an employee could claim LTA exemption twice in a block of four years, provided the travel expenses were legitimate. LTA is applicable only to travel costs such as air, rail, or bus fare, and does not cover expenses related to food, lodging, or sightseeing.
For claiming LTA, the journey must be taken by the employee and their immediate family members, and proper proof of travel, such as tickets and invoices, is required. In case an employee does not utilize their LTA benefit, the unclaimed amount becomes taxable.
HRA and LTA Tax Benefits Comparison Under the Old Tax Regime
Particulars | House Rent Allowance (HRA) | Leave Travel Allowance (LTA) |
Definition | Allowance for rented accommodation expenses | Allowance for travel expenses within India |
Tax Exemption | Exempt under Section 10(13A) | Exempt under Section 10(5) |
Conditions | Based on rent paid, basic salary, and city category | Available for domestic travel only, claimed twice in four years |
Calculation | Minimum of: Actual HRA received, 50% of basic salary (metro)/40% (non-metro), Rent paid - 10% of basic salary | Limited to actual travel expenses incurred |
Maximum Limit | No fixed upper limit, depends on salary and rent paid | No fixed upper limit, but only actual travel expenses can be claimed |
Example | HRA received: ₹30,000, Rent paid: ₹28,000, Basic Salary: ₹70,000 → Exempt: ₹21,000 | LTA received: ₹50,000, Travel expenses: ₹45,000 → Exempt: ₹45,000 |
Impact on Taxable Income | Reduces taxable salary by exempted amount | Reduces taxable salary if claimed correctly |
The comparison highlights that both HRA and LTA provided significant tax savings under the old tax regime, making it beneficial for salaried employees who incur rental or travel expenses.
HRA Tax Benefit: Old vs. New Tax Regime
HRA Under the Old Tax Regime
Under the old tax regime, HRA exemption was calculated as the least of the following:
Actual HRA received
50% of basic salary (for metro cities) or 40% (for non-metro cities)
Rent paid minus 10% of basic salary
Example:
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
HRA Under the New Tax Regime
Under the new tax regime, HRA exemption is not available. The entire HRA component is taxable, increasing the total taxable income.
LTA Tax Benefit: Old vs. New Tax Regime
LTA Under the Old Tax Regime
Under the old tax regime, LTA was exempt under Section 10(5), subject to the following conditions:
Only domestic travel expenses were covered.
The exemption was available for two journeys in a block of four years.
LTA covered only travel expenses, not food or accommodation.
Example:
LTA Received: ₹30,000
Travel Expenses: ₹25,000 (within India)
LTA Exempted: ₹25,000
Taxable LTA: ₹5,000
LTA Under the New Tax Regime
Under the new tax regime, LTA exemption has been removed, making the entire amount taxable.
HRA and LTA Tax Benefits Comparison in Old and New Tax Regimes
Feature | HRA (Old Regime) | HRA (New Regime) | LTA (Old Regime) | LTA (New Regime) |
Exemption Available | Yes | No | Yes | No |
Tax Benefit | Partial Exemption | Fully Taxable | Travel Expenses Exempt | Fully Taxable |
Conditions | Based on Salary, Rent, and City | Not Applicable | Only for Domestic Travel | Not Applicable |
Claim Frequency | Monthly | Not Applicable | Twice in 4-Year Block | Not Applicable |
Impact of Removal of HRA and LTA Benefits
Higher Taxable Income: Employees who relied on HRA and LTA for tax savings will see an increase in their taxable salary under the new regime.
Reduced Flexibility: The removal of these exemptions limits tax-saving options for salaried employees.
Salary Restructuring: Employees may negotiate higher basic salaries or alternative benefits to compensate for the loss of exemptions.
Conclusion
The removal of HRA and LTA exemptions in the new tax regime has significantly altered tax planning for salaried individuals. While the new regime simplifies tax calculations, it eliminates several deductions that were beneficial under the old regime. Taxpayers must carefully assess their financial situation to determine which tax structure works best for them.
FAQs
Can I claim HRA under the new tax regime?
No, HRA exemption is not available under the new tax regime. Your entire HRA component will be added to your taxable income and taxed as per the applicable slab rate. If you are living in rented accommodation and rely on HRA for tax savings, it may be more beneficial to opt for the old tax regime where the exemption is still available.
Is LTA still tax-exempt under the new tax regime?
No, under the new tax regime, LTA is fully taxable. Previously, in the old tax regime, LTA could be claimed as an exemption for actual travel expenses incurred for domestic trips twice in a four-year block. With the new tax regime eliminating such exemptions, salaried employees who used LTA to save tax will now see an increase in their taxable income.
How is HRA exemption calculated under the old tax regime?
The HRA exemption under the old tax regime is determined as the lowest of the following three amounts:
Actual HRA received from the employer.
50% of the basic salary if residing in a metro city (Delhi, Mumbai, Kolkata, Chennai) or 40% of the basic salary for non-metro cities.
Rent paid minus 10% of the basic salary. If an employee pays high rent in a metro city, they may receive a substantial exemption, reducing their taxable income significantly.
Can I switch between the old and new tax regimes?
Yes, salaried individuals can switch between the old and new tax regimes every financial year while filing their income tax return. However, individuals with business income who opt for the new tax regime cannot switch back to the old tax regime once selected. It is advisable to calculate the tax liability under both regimes before making a choice each year.
Can LTA be claimed for international travel?
No, LTA exemption is strictly applicable for domestic travel within India. Even under the old tax regime, travel expenses incurred for foreign trips do not qualify for LTA exemption. The exemption is only available for costs related to travel by air, rail, or road within India for the employee and their family members.
What happens if I don’t have rent expenses?
If you do not pay rent, you cannot claim HRA exemption under the old tax regime. In such cases, the new tax regime may be more beneficial, as it offers lower tax rates without the need for deductions or exemptions. However, if you have other deductions like home loan interest or 80C investments, the old tax regime might still be better.
Does the new tax regime offer any deductions?
The new tax regime provides a higher standard deduction of ₹75,000 (compared to ₹50,000 under the old regime) but removes most other exemptions and deductions. This means that while the tax slabs are lower, salaried individuals cannot claim benefits like HRA, LTA, home loan interest, 80C deductions, and others.
Is employer-provided accommodation affected by the tax regime choice?
Employer-provided accommodation is subject to different tax rules, and its taxation is not directly impacted by the choice of tax regime. The perquisite value of rent-free accommodation provided by an employer is determined separately based on the type of accommodation and city category.
Can I claim both HRA and home loan deductions?
Yes, under the old tax regime, you can claim both HRA exemption and home loan deductions if you fulfill the eligibility criteria. For example, if you stay in a rented house and own a home in another city where you have taken a loan, you can claim both benefits. This significantly reduces your taxable income under the old tax regime.
How often can LTA be claimed?
Under the old tax regime, LTA can be claimed twice in a block of four years. If you do not claim it in one block, you may carry it forward to the first year of the next block. However, the exemption is only available on actual travel expenses incurred within India.
Is the new tax regime beneficial for all salaried employees?
The new tax regime benefits employees who do not have significant deductions, as it offers lower tax rates and a simplified tax structure. However, those who rely on exemptions like HRA, LTA, and deductions under Sections 80C, 80D, and 24(b) may find the old tax regime more tax-efficient.
Are there chances of reinstating HRA and LTA exemptions?
Currently, there is no official confirmation from the government regarding the reinstatement of HRA and LTA exemptions under the new tax regime. The government has introduced this simplified tax regime to eliminate complexities, and future budgets will determine if any changes are made.
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