HRA and LTA Tax Benefits: Should You Switch Regimes?

The introduction of the new tax regime has left many salaried employees wondering whether to stick with the old regime and claim exemptions like HRA and LTA or switch to the new regime for lower tax rates. The choice is not always straightforward, as it depends on individual salary structures, rental expenses, travel expenditures, and other tax-saving options.

House Rent Allowance (HRA) and Leave Travel Allowance (LTA) are important components of a salaried employee’s income that provide significant tax benefits under the old tax regime. This article explores the tax benefits of HRA and LTA, explains how exemptions work, compares both tax regimes, and helps you determine the most beneficial option for your financial situation. rebate and HRA tax benefits, eligibility criteria, calculation methods, and strategies to maximize savings.

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Table of Contents

Understanding HRA and Its Tax Benefits

Understanding LTA and Its Tax Benefits

Comparison: Old vs. New Tax Regime

Standard Deduction and Other Considerations

Conclusion

FAQs

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Understanding HRA and Its Tax Benefits

What is HRA?

House Rent Allowance (HRA) is an allowance provided by employers to help employees cover their rental expenses. Under Section 10(13A) of the Income Tax Act, a portion of HRA is exempt from tax if specific conditions are met. However, under the new tax regime, HRA exemptions are not available.

Eligibility Criteria for HRA Exemption

To claim an HRA exemption, you must:

• Be a salaried individual receiving HRA as part of your salary structure.

• Be residing in rented accommodation and paying rent.

• Not own the house in which you are residing.

• Submit valid rent receipts or rental agreements as proof.

• If paying rent to parents or relatives, ensure they declare this rental income in their tax return.

How to Calculate HRA Exemption

The tax exemption on HRA is the lowest of the following three amounts:

1. Actual HRA received from your employer

2. 50% of salary (for metro cities) or 40% of salary (for non-metro cities)

3. Rent paid minus 10% of salary

Example of HRA Calculation

Scenario:

• Basic Salary: ₹60,000 per month

• HRA Received: ₹25,000 per month

• Rent Paid: ₹22,000 per month

• Metro City Resident

Calculation:

1. Actual HRA received: ₹25,000

2. 50% of salary: ₹30,000 (50% of ₹60,000)

3. Rent Paid – 10% of Salary: ₹22,000 - ₹6,000 = ₹16,000

HRA exemption = ₹16,000 (lowest of the three).

HRA Exemption Table

Income Component	Metro City (50% of Salary)	Non-Metro City (40% of Salary)
Basic Salary: ₹60,000	₹30,000	₹24,000
Rent Paid: ₹22,000	₹22,000	₹22,000
10% of Basic Salary	₹6,000	₹6,000
HRA Received: ₹25,000	₹25,000	₹25,000
HRA Exemption (Lowest of the Three)	₹16,000	₹16,000

Understanding LTA and Its Tax Benefits

What is LTA?

Leave Travel Allowance (LTA) is a tax-exempt allowance provided by employers to cover travel expenses incurred by employees during their leave. It is exempt from tax under Section 10(5) of the Income Tax Act, provided certain conditions are met.

Eligibility Criteria for LTA Exemption

• LTA can be claimed only for domestic travel (India-based travel expenses).

• Only actual travel costs (airfare, train, or bus tickets) are exempt. Expenses on food, lodging, and sightseeing are not covered.

• The employee must be on leave and traveling within India.

• LTA can only be claimed if it is part of the employee’s salary structure.

• The exemption is available twice in a block of four years (current block: 2022-2025).

How to Claim LTA

To claim LTA, the employee must provide:

• Travel tickets and boarding passes.

• Proof of travel in the form of invoices from airlines, railways, or bus services.

• The claim must be submitted to the employer as per company policies.

LTA Claim Example

Scenario:

• LTA Received: ₹40,000

• Travel Expenses: ₹32,000

• Tax-Exempt LTA: ₹32,000

• Taxable LTA: ₹8,000

Since the travel expenses are less than the LTA received, only ₹32,000 will be exempt, and the remaining ₹8,000 will be taxable.

LTA is a great tax-saving option under the old regime, but it is not available under the new tax regime.

Comparison: Old vs. New Tax Regime

Tax Slabs Under Both Regimes

Income Slab (₹)	Old Regime Tax Rate	New Regime Tax Rate
0 - 2,50,000	Nil	Nil
2,50,001 - 5,00,000	5%	5%
5,00,001 - 7,00,000	20%	5%
7,00,001 - 10,00,000	20%	10%
10,00,001 - 12,00,000	30%	15%
12,00,001 - 15,00,000	30%	20%
Above 15,00,000	30%	30%

Note:

• A tax rebate up to ₹25,000 is applicable if the total income does not exceed ₹7,00,000, meaning no tax liability for income up to ₹7,00,000.

• The standard deduction for salaried employees under the new regime is ₹75,000.

• The deduction on family pension received has increased from ₹15,000 to ₹25,000.

• The deduction limit on the employer's contribution to NPS is 14% for FY 2024-25.

• The highest surcharge rate under the new regime is 25%, compared to 37% in the old regime.

• The new regime is the default tax regime; individuals opting for the old regime must file Form 10-IEA.

Key Differences

• HRA and LTA exemptions: Available only in the old tax regime.

• Standard deduction: ₹75,000 in the new regime, ₹50,000 in the old regime.

• Lower tax rates: Offered in the new regime.

• More deductions: Available in the old regime (80C, 80D, etc.).

Which Tax Regime Should You Choose?

• If you claim high deductions (HRA, LTA, 80C investments), the old regime is better.

• If you have minimal deductions, the new regime offers lower tax rates and could be more beneficial.

Standard Deduction and Other Considerations

Standard Deduction

The standard deduction is a flat amount that salaried employees can deduct from their taxable income. The applicable standard deduction rates are:

• Old Tax Regime: ₹50,000 per year

• New Tax Regime (FY 2024-25 onwards): ₹75,000 per year

This increase in the standard deduction under the new tax regime makes it a more attractive option for those who do not claim multiple other deductions.

Other Considerations

1. Employer’s NPS Contribution: Under the new tax regime, an employer’s contribution to the National Pension System (NPS) is deductible up to 14% of salary for central government employees and 10% for others.

   
   

2. Tax Rebate Under Section 87A: In the new tax regime, taxpayers earning up to ₹7,00,000 can claim a rebate of ₹25,000, effectively making their tax liability zero.

   
   

3. Deductions for Family Pension Recipients: The deduction on family pension received has been increased from ₹15,000 to ₹25,000 under the new tax regime.

   
   

4. Surcharge Rates: The highest surcharge rate has been reduced from 37% (old regime) to 25% (new regime), reducing the tax burden on high-income earners.

These considerations, along with the higher standard deduction, make the new tax regime a competitive alternative to the old one for many taxpayers.

Conclusion

Choosing the right tax regime depends on how much you benefit from deductions. If HRA and LTA exemptions significantly reduce your taxable income, the old regime may be preferable. However, if you do not claim many deductions, the new tax regime with lower rates may be a better option.

FAQs

1. Can I claim both HRA and LTA in the new tax regime?

   No, under the new tax regime, exemptions on HRA and LTA are not available. These benefits are only applicable under the old tax regime. If you choose the new regime, you will pay tax on your full salary without deductions for rent or travel expenses. It is recommended that employees who incur significant rental or travel expenses compare their tax liability under both regimes before making a decision.

   
   

2. Can I switch between tax regimes every year?

   Yes, salaried employees can choose their preferred tax regime every financial year while filing their income tax return (ITR). However, individuals with business income can switch back to the old tax regime only once after opting for the new regime. To continue with the old tax regime, salaried employees must file Form 10-IEA before the due date of the ITR.

3. Can I claim LTA for international travel?

   No, LTA is only applicable for domestic travel within India. International airfare, hotel stays, and sightseeing expenses are not covered under LTA exemption. The exemption applies only to travel expenses such as airfare, rail, or bus fare incurred while traveling within India during official leave.

4. Is rent paid to parents eligible for HRA exemption?

   Yes, rent paid to parents is eligible for HRA exemption, provided a formal rental agreement is in place and rent is paid via bank transfer or check. However, your parents must declare this rental income in their tax return. If they fail to do so, the transaction could be scrutinized by tax authorities. Also, if you are a co-owner of the house, you cannot claim HRA exemption.

5. How do I determine which tax regime is better for me?

   The choice between the old and new tax regimes depends on the deductions and exemptions you can claim. If you benefit from deductions such as HRA, LTA, 80C (PF, PPF, ELSS, life insurance), 80D (medical insurance), and home loan interest, the old regime may be more advantageous. If you do not claim multiple deductions, the lower tax rates in the new regime may be beneficial. Taxpayers should use an online tax calculator to compare their tax liability under both regimes before making a decision.

6. What happens if I do not submit rent receipts for HRA?

   If you fail to submit rent receipts, your employer will consider the entire HRA amount as taxable income, and it will be included in your salary for tax calculation. You may still claim HRA exemption while filing your ITR, but you must keep rent receipts and a rental agreement as proof in case of scrutiny by tax authorities.

7. Can both spouses claim LTA separately?

   Yes, if both spouses receive LTA as part of their salary package, they can claim LTA exemption separately. However, the exemption can only be claimed for two journeys in a block of four years (current block: 2022-2025). If one spouse claims an exemption for a journey in a particular year, the other spouse should plan their claims accordingly to maximize tax benefits.

8. Does the standard deduction apply in both tax regimes?

   Yes, but the amount differs. Under the old tax regime, the standard deduction is ₹50,000, while under the new tax regime for FY 2024-25 onwards, it has been increased to ₹75,000. This increase makes the new regime more attractive for salaried employees who do not claim other deductions.

9. What if my LTA claim exceeds my actual travel expenses?

   If your LTA claim is higher than your actual travel expenses, only the amount spent on travel will be tax-exempt, and the remaining balance will be taxable. For example, if you receive ₹50,000 as LTA but your actual travel expenses are ₹35,000, then only ₹35,000 will be exempt from tax, and the remaining ₹15,000 will be treated as part of your taxable income.

10. Is the new tax regime mandatory?

    No, the new tax regime is not mandatory, but it is the default regime. If you do not specify your choice, the new tax regime will automatically be applied to you. Employees who wish to continue under the old tax regime must file Form 10-IEA while submitting their income tax return.

11. Can I claim deductions under Section 80C in the new tax regime?

    No, the new tax regime does not allow deductions under Section 80C, which includes investments in EPF, PPF, ELSS, NSC, life insurance premiums, tuition fees, and home loan principal repayment. If you rely on these deductions for tax savings, the old tax regime may be a better option.

12. Are deductions for home loan interest allowed in the new tax regime?

    No, deductions for home loan interest under Section 24(b) (₹2 lakh deduction for self-occupied homes) are not available in the new tax regime. However, deductions for home loan interest on rented properties are available under certain conditions.

13. Can I claim medical insurance deductions under Section 80D in the new tax regime?No, deductions for health insurance premiums under Section 80D are not allowed in the new tax regime. If you pay high premiums for medical insurance, the old tax regime may provide more tax savings.

    
    

14. What is the highest surcharge rate in the new tax regime?

    The highest surcharge rate in the new tax regime is 25%, reduced from 37% in the old tax regime. This reduction benefits high-income earners with taxable income above ₹5 crore.