HRA Deduction Under New vs. Old Tax Regime
Housing Rent Allowance (HRA) is a significant tax-saving tool for salaried employees residing in rented accommodation. It provides relief by reducing taxable income, making it a crucial component of salary structures. However, with the introduction of the new tax regime, many exemptions, including HRA, have been eliminated, prompting confusion among taxpayers about whether to continue with the old regime or switch to the new one.
This article aims to clarify the differences between HRA deductions in both tax regimes, discuss their financial implications, and provide a comprehensive guide on making an informed tax decision.
Table of Contents
HRA Deduction Under the Old Tax Regime: Eligibility and Benefits
Under the old tax regime, salaried employees can claim HRA deductions under Section 10(13A) of the Income Tax Act, provided they live in a rented house. This exemption helps reduce taxable income and results in lower tax liability.
Who Can Claim HRA Under the Old Regime?
The employee must be receiving HRA as part of their salary.
The employee must be paying rent for a residential accommodation.
HRA cannot be claimed if the employee resides in a self-owned house.
If the annual rent exceeds ₹1 lakh, the landlord’s PAN details must be provided.
Proper rent receipts and rental agreements should be maintained for verification.
How Is HRA Exemption Calculated?
The HRA exemption is determined as the lowest of the following three amounts:
Actual HRA received from the employer.
50% of the basic salary (for metro cities) or 40% of the basic salary (for non-metro cities).
Rent paid minus 10% of the basic salary.
Example of HRA Calculation: Understanding the Exemption
Neha, a salaried employee working in Delhi (a metro city), earns a basic salary of ₹80,000 per month and receives an HRA of ₹35,000 per month. She pays ₹32,000 as rent.
Calculation Criteria | Amount (₹) |
Actual HRA received | 35,000 |
50% of Basic Salary (Metro) | 40,000 |
Rent Paid - 10% of Basic Salary | 32,000 - 8,000 = 24,000 |
Since ₹24,000 is the lowest, Neha can claim an HRA exemption of ₹24,000 per month or ₹2,88,000 annually under the old tax regime.
HRA Deduction Under the New Tax Regime: What Has Changed?
Under the new tax regime, HRA exemption is not available. This means that even if an employee receives HRA as part of their salary, they cannot claim any exemption on it, and the full amount will be added to taxable income.
Why Was HRA Exemption Removed in the New Tax Regime?
The government introduced the new tax regime to simplify the tax structure and offer lower tax rates. However, to compensate for these lower rates, most exemptions and deductions, including HRA, Section 80C, 80D, and home loan interest deductions, have been eliminated.
Are There Any Alternative Tax Benefits in the New Regime?
Despite the removal of HRA, the new tax regime offers other benefits, such as:
Higher Standard Deduction: ₹75,000 for salaried individuals (compared to ₹50,000 in the old regime).
Lower Income Tax Rates: Making it beneficial for those who do not claim many deductions.
Employer Contributions to NPS: Under Section 80CCD(2), employer contributions to the National Pension System (NPS) are still deductible.
Comparison of HRA Deduction under New vs. Old Tax Regime
Feature | New Tax Regime | Old Tax Regime |
HRA Deduction | Not Available | Available |
Standard Deduction | ₹75,000 | ₹50,000 |
Other Deductions (80C, 80D) | Not Available | Available |
Lower Tax Slabs | Yes | No |
Best Suited For | Individuals with no major deductions | Individuals with multiple deductions |
Conclusion
The old tax regime remains the better choice for individuals who rely on multiple deductions, including HRA, whereas the new tax regime offers lower tax rates and a simpler filing process. Evaluating your income, expenses, and deductions under both regimes will help you make an informed decision for maximizing your tax savings.
FAQ
1. Can I claim HRA exemption under the new tax regime?
No, HRA exemption is not available under the new tax regime. If you opt for the new regime, your full HRA will be taxed.
2. Will my employer still provide HRA in my salary under the new tax regime?
Yes, HRA will still be part of your salary structure, but you cannot claim any exemption on it in the new tax regime.
3. How does the removal of HRA exemption impact my tax liability?
Without HRA exemption, your taxable income increases, leading to higher tax liability compared to the old tax regime if you were previously benefiting from deductions.
4. Are there any alternative exemptions for rent in the new tax regime?
No, most exemptions, including HRA, 80C, and 80D, have been removed in the new tax regime.
5. Can I switch back to the old tax regime if I find the new regime unfavorable?
Yes, salaried individuals can choose between the old and new tax regimes each financial year while filing their ITR.
6. Can I claim HRA if I pay rent to my parents?
Yes, but you must provide proof of rent payments, and your parents must declare this amount as rental income in their ITR.
7. Can self-employed individuals claim HRA exemption?
No, but self-employed individuals can claim rent deductions under Section 80GG, subject to conditions.
8. What if my landlord refuses to provide PAN details?
If your annual rent exceeds ₹1 lakh, PAN details are mandatory. If the landlord refuses, your HRA exemption claim may be rejected.
9. Can I claim both home loan benefits and HRA?
Yes, if you own a home but live in a rented house due to work-related reasons, you can claim both deductions under the old tax regime.
10. Can I claim HRA if I pay rent to my spouse?
No, the Income Tax Department does not allow HRA claims for rent paid to a spouse.
11. What happens if I submit false rent receipts for HRA claims?
Providing false rent receipts can lead to penalties, tax audits, and legal consequences.
12. How do I decide between the old and new tax regimes?
Choose the old tax regime if you benefit from deductions like HRA, 80C, and home loan interest.
Choose the new tax regime if you prefer lower tax rates and a simplified tax structure.
Related Posts
See AllA lot of landowners want to build a home on their property. Nevertheless, the landowner can lack the funds and other assets necessary to...
An accurate understanding of how investments operate is essential to effectively split and use your earned income to achieve financial...
Comments