HRA vs. Standard Deduction: Which is Better Under the New Tax Regime?
The Indian taxation landscape has undergone significant changes with the introduction of the new tax regime under Section 115BAC of the Income Tax Act. This regime offers taxpayers the option to choose between the existing (old) tax structure, which includes various exemptions and deductions, and a simplified new tax structure with reduced tax rates but limited deductions. Two critical components in this decision-making process are the House Rent Allowance (HRA) and the Standard Deduction. Understanding how these elements function under both regimes is essential for taxpayers aiming to optimize their tax liabilities.
Table of Content
Understanding the New Tax Regime (Section 115BAC)
Features of the New Tax Regime
Lower Tax Rates: The new tax regime introduces concessional tax rates.
No Major Deductions: Most deductions and exemptions, including HRA, Section 80C benefits, and interest on home loans, are not available.
Optional: Taxpayers can choose between the old and new regimes annually, depending on what benefits them more.
New Tax Slabs for FY 2024-25
Income Range (₹) | 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 |
Rebate Under Section 115BAC
If total income (after deductions) does not exceed ₹7,00,000, a rebate of ₹25,000 is available.
If opting for the old tax regime, rebate applies if total income does not exceed ₹5,00,000, with a maximum rebate of ₹12,500.
Additional Benefits Under New Regime for FY 2024-25
Standard Deduction increased from ₹50,000 to ₹75,000.
Family Pension Deduction increased from ₹15,000 to ₹25,000.
Employer's Pension Contribution (Section 80CCD(2)) deduction increased from 10% to 14% of salary.
What is House Rent Allowance (HRA)?
House Rent Allowance (HRA) is a component of an employee’s salary provided to cover rental accommodation expenses. It helps salaried individuals reduce their taxable income under the old tax regime, as HRA is partially or fully exempt from tax under Section 10(13A) of the Income Tax Act.
Eligibility for HRA Exemption
To claim HRA exemption under the old tax regime, the following conditions must be met:
Salaried Employee: The individual must be a salaried employee receiving HRA as part of their salary structure.
Rent Payment: The employee must be paying rent for residential accommodation.
Property Ownership: The rented premises should not be owned by the employee.
Declaration & Proof: Employees need to provide rent receipts or rental agreements as proof.
Tax Benefit of HRA
The amount of HRA exemption is calculated as the least of the following:
Actual HRA received from the employer.
50% of salary (for metro cities) or 40% of salary (for non-metro cities).
Actual rent paid minus 10% of salary.
HRA exemption is only available under the old tax regime. If an individual opts for the new tax regime, HRA benefits are forfeited.
What is Standard Deduction?
Standard Deduction is a flat deduction from the gross salary of an individual, reducing taxable income. It is available to both salaried employees and pensioners.
Benefits of Standard Deduction
No Proof Required: Unlike HRA, which requires rental proof, Standard Deduction is automatically applicable without documentation.
Fixed Benefit: In the new tax regime, the Standard Deduction has been increased from ₹50,000 to ₹75,000.
Applicable to All Salaried Individuals and Pensioners: Unlike HRA, which is only available to those receiving an HRA component, Standard Deduction applies universally to all salaried employees and pensioners.
Key Differences: HRA vs. Standard Deduction
Feature | House Rent Allowance (HRA) | Standard Deduction |
Availability | Only for salaried individuals receiving HRA and paying rent | Available to all salaried individuals and pensioners |
Requirement | Requires actual rent payment and proof | No documentation required |
Amount | Varies based on salary, rent paid, and location | Fixed ₹75,000 (new tax regime) |
Tax Regime | Available only in the old tax regime | Available in both tax regimes |
Why is HRA Not Available in the New Tax Regime?
The new tax regime, introduced under Section 115BAC, eliminates most deductions and exemptions, including HRA, to simplify tax calculations. The government offers lower tax rates under this regime but removes tax-saving components like HRA, 80C, and 80D deductions. Instead, a flat Standard Deduction of ₹75,000 is allowed to salaried individuals, making tax filing more straightforward while reducing exemptions that favor only specific taxpayers.
For individuals paying high rent, the absence of HRA exemption can result in higher tax liability under the new tax regime. However, for those who do not pay rent or do not receive HRA as part of their salary, the new tax regime, with lower tax rates and a higher Standard Deduction, may still be beneficial.
Tax Savings Comparison: HRA vs. Standard Deduction
Example 1: Salaried Individual Paying Rent
Assumptions:
Annual Salary: ₹12,00,000
HRA Received: ₹3,00,000
Actual Rent Paid: ₹3,60,000
Metro City
Old Tax Regime Calculation:
Description | Amount (₹) |
Gross Income | 12,00,000 |
Standard Deduction | -50,000 |
HRA Exemption | -2,40,000 |
Taxable Income | 9,10,000 |
Tax Payable | 94,500 |
New Tax Regime Calculation:
Description | Amount (₹) |
Gross Income | 12,00,000 |
Standard Deduction | -75,000 |
Taxable Income | 11,25,000 |
Tax Payable | 52,500 |
Tax Savings with New Regime: ₹42,000
Example 2: Salaried Individual Owning a House
Assumptions:
Annual Salary: ₹12,00,000
No HRA Received
Old Tax Regime Calculation:
Description | Amount (₹) |
Gross Income | 12,00,000 |
Standard Deduction | -50,000 |
Taxable Income | 11,50,000 |
Tax Payable | 1,12,500 |
New Tax Regime Calculation:
Description | Amount (₹) |
Gross Income | 12,00,000 |
Standard Deduction | -75,000 |
Taxable Income | 11,25,000 |
Tax Payable | 52,500 |
Tax Savings with New Regime: ₹60,000
Conclusion: HRA vs. Standard Deduction
If you pay high rent and receive substantial HRA, the old tax regime may be better.
If you have minimal exemptions and deductions, the new tax regime with a ₹75,000 standard deduction is likely more beneficial.
FAQs
1. Can I claim both HRA and Standard Deduction under the old tax regime?
Yes, under the old tax regime, both HRA and Standard Deduction can be claimed. HRA helps reduce taxable income for individuals paying rent, while the Standard Deduction is a fixed deduction available to all salaried individuals and pensioners.
2. Is Standard Deduction available in the new tax regime?
Yes, the Standard Deduction is available in the new tax regime. The deduction has been increased from ₹50,000 to ₹75,000 for FY 2024-25, making it more beneficial for salaried individuals and pensioners.
3. Is HRA available under the new tax regime?
No, HRA exemption is not available under the new tax regime. The government has removed most exemptions and deductions, including HRA, under Section 115BAC to simplify tax calculations.
4. How do I decide whether to choose the old or new tax regime?
The choice depends on your salary structure, deductions, and exemptions. If you claim significant deductions like HRA, 80C (investments), or 80D (medical insurance), the old tax regime may be better. However, if you do not have many deductions, the new tax regime with lower tax rates and a ₹75,000 Standard Deduction may be more beneficial.
5. Can I switch between the old and new tax regimes every year?
Yes, salaried individuals can choose between the old and new tax regimes every financial year before filing their Income Tax Return (ITR). However, business owners or those with professional income can switch only once.
6. What happens if I have HRA in my salary but choose the new tax regime?
If you opt for the new tax regime, you cannot claim HRA exemption, even if HRA is part of your salary. The entire HRA amount will be considered taxable income.
7. Is HRA applicable to self-employed individuals?
No, HRA is only available to salaried individuals. However, self-employed individuals who pay rent can claim a deduction under Section 80GG, subject to certain conditions.
8. What is the biggest advantage of the new tax regime?
The primary advantage of the new tax regime is simplification—there’s no need to keep track of multiple exemptions and deductions. The tax rates are lower, and a Standard Deduction of ₹75,000 is automatically applied.
9. Do pensioners also get the Standard Deduction?
Yes, pensioners can claim the Standard Deduction of ₹75,000 in the new tax regime. This helps reduce taxable pension income.
10. Can I claim deductions under Section 80C (LIC, PPF, EPF, ELSS) in the new tax regime?
No, deductions under Section 80C, which include investments in PPF, LIC premiums, EPF, ELSS, and home loan principal repayment, are not available under the new tax regime.
11. Will the old tax regime be discontinued in the future?
There is no official announcement about discontinuing the old tax regime. However, the government is promoting the new tax regime by increasing the Standard Deduction and simplifying tax structures.
12. What is the biggest disadvantage of the new tax regime?
The biggest disadvantage of the new tax regime is the lack of exemptions and deductions. Taxpayers who used to save tax through HRA, 80C investments, home loan interest (Section 24), or 80D (health insurance) may end up paying higher taxes if they opt for the new regime.
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