Old vs New Tax Regime: HRA and LTA Differences
House Rent Allowance (HRA) and Leave Travel Allowance (LTA) have been essential components of a salaried employee’s tax-saving strategy. These allowances help reduce taxable income under the old tax regime. However, the new tax regime, introduced to simplify taxation, eliminates many deductions and exemptions, including HRA and LTA benefits.
This article provides a comprehensive comparison of HRA and LTA under both tax regimes, including calculations, case studies, and guidance on choosing the most suitable tax structure.
Table of Contents
Understanding HRA and LTA
House Rent Allowance (HRA) and Leave Travel Allowance (LTA) are key components of an employee's salary structure. These allowances provide tax benefits under the old tax regime, allowing salaried individuals to reduce their taxable income.
House Rent Allowance (HRA)
HRA is provided to employees to cover their rental expenses. It is a partially tax-exempt component of salary and is especially beneficial for individuals living in rented accommodations. However, the exemption is subject to specific conditions and calculations.
Leave Travel Allowance (LTA)
LTA is an allowance granted by employers to cover employees' travel expenses. The exemption for LTA is available only for domestic travel and is limited to the cost of transportation. Employees can claim LTA twice in a block of four years.
HRA Exemption Under the Old Tax Regime
Under the old tax regime, an employee can claim an exemption on HRA under Section 10(13A) of the Income Tax Act. The exemption is calculated based on the following three factors, and the lowest of the three is exempt from tax:
Actual HRA received from the employer.
50% of basic salary (for metro cities) or 40% of basic salary (for non-metro cities).
Rent paid minus 10% of basic salary.
For example, if an employee earns a basic salary of ₹50,000 per month, receives an HRA of ₹20,000, and pays ₹25,000 in rent, the exemption will be calculated as follows:
50% of basic salary (metro city) = ₹25,000
Rent paid minus 10% of basic salary = ₹25,000 - ₹5,000 = ₹20,000
Actual HRA received = ₹20,000
The lowest of these three amounts (₹20,000) is exempt from tax, and only the remaining HRA, if any, is taxable.
HRA Treatment Under the New Tax Regime
The new tax regime, introduced in Budget 2020, offers lower tax rates but eliminates many exemptions and deductions, including HRA. This means:
The entire HRA amount is added to taxable salary.
Employees cannot claim any deductions for rent paid.
Tax liability increases for those paying high rent.
For example, in the new regime, if an employee receives an HRA of ₹20,000 per month, the entire amount will be subject to tax based on their applicable slab rate.
LTA Exemption Under the Old Tax Regime
LTA exemption is available under Section 10(5) of the Income Tax Act. Key points include:
Exemption is applicable only on travel expenses incurred for domestic travel.
It covers transportation expenses (air, rail, or bus fare) but not expenses related to accommodation, food, or sightseeing.
Employees can claim LTA exemption for two journeys in a block of four years.
If LTA is not utilized, it can be carried forward to the next block.
For example, if an employee takes a trip from Mumbai to Delhi with a train fare of ₹5,000 per person and travels with four family members, the exemption will be ₹25,000 (₹5,000 × 5). If the LTA received is ₹30,000, the remaining ₹5,000 will be taxable.
LTA Treatment Under the New Tax Regime
The new tax regime does not provide any exemption for LTA. This means:
The entire LTA amount received by an employee is added to taxable salary.
Employees cannot claim deductions for travel expenses.
Tax liability increases as compared to the old regime for those utilizing LTA benefits.
For example, if an employee receives ₹30,000 as LTA, the full amount will be taxed without any deductions for travel expenses.
Old vs New Tax Regime: A Detailed Comparison of HRA and LTA
Feature | Old Tax Regime | New Tax Regime |
HRA Exemption | Available | Not Available |
LTA Exemption | Available | Not Available |
Complexity | Higher (due to deductions and exemptions) | Lower (flat tax rates, no exemptions) |
Suitability | Beneficial for those with high HRA/LTA claims | Suitable for those with lower deductions |
Example Calculations: HRA and LTA Tax Benefits
Example 1: HRA Calculation in Old Regime
Basic Salary: ₹50,000
HRA Received: ₹20,000
Rent Paid: ₹25,000
HRA Exemption: ₹20,000 (calculated as per the exemption formula)
Taxable HRA: ₹0
Example 2: HRA Calculation in New Regime
HRA Received: ₹20,000
The entire amount is taxable, leading to higher tax liability.
Example 3: LTA Calculation in Old Regime
LTA Received: ₹30,000
Travel Expenses: ₹25,000
Exempted Amount: ₹25,000
Taxable LTA: ₹5,000
Example 4: LTA Calculation in New Regime
LTA Received: ₹30,000
The entire amount is taxable without any exemption.
Case Studies: Who Benefits from Each Regime?
Employee A (High Rent & Travel Expenses)
Employee A pays ₹30,000 rent and receives ₹25,000 HRA.
They also travel frequently and utilize LTA.
The old tax regime is more beneficial as it allows them to claim HRA and LTA exemptions, reducing taxable income.
Employee B (Minimal Deductions & Low HRA/LTA)
Employee B lives with family and does not pay rent.
They do not claim LTA exemptions.
The new tax regime is more beneficial as they do not have deductions to utilize and can benefit from lower tax rates.
Key Considerations Before Choosing a Tax Regime
Salary Structure: Employees with high HRA and LTA benefits may prefer the old regime.
Deductions & Exemptions: Those who claim significant deductions under 80C, 80D, or 24(b) (home loan interest) should analyze their tax savings.
Income Level: The new regime offers lower tax rates, making it suitable for those with minimal deductions.
Alternative Tax-Saving Strategies Without HRA and LTA
Since the new tax regime does not allow HRA and LTA exemptions, employees can consider other strategies:
Employer Contributions to NPS: Up to 10% of salary can be deducted under Section 80CCD(2).
Health Insurance Premium (Section 80D): Employees can claim up to ₹25,000 (₹50,000 for senior citizens).
Standard Deduction: A flat ₹50,000 deduction is available under both regimes.
Education Loan Interest (Section 80E): Interest paid on education loans is deductible.
Conclusion
Choosing between the old and new tax regimes requires careful assessment. Employees who benefit from HRA and LTA exemptions may prefer the old regime, while those with fewer deductions may find the new regime advantageous due to lower tax rates. Evaluating income, exemptions, and tax liability through calculations will help in making the most tax-efficient choice.
FAQs
Can I claim HRA exemption under the new tax regime?
No, HRA exemption is not available under the new tax regime. All HRA received is fully taxable, and no deductions are provided for rental expenses.
Is LTA tax-free under the new tax regime?
No, LTA is fully taxable under the new tax regime. Employees cannot claim tax benefits for travel expenses.
Which tax regime is better for salaried employees with HRA and LTA?
The old tax regime is better for employees with significant HRA and LTA benefits, as these exemptions reduce taxable income. The new regime may be preferable for those without deductions.
Can I switch tax regimes every year?
Yes, salaried employees can switch tax regimes annually while filing their tax returns. However, business professionals can only switch once.
What happens if I live in a rented house under the new tax regime?
Since the new tax regime does not allow HRA exemption, the entire rent payment will have no tax benefits. You may want to compare your tax liability under both regimes before deciding.
Can I claim HRA if I pay rent to my parents?
Under the old tax regime, yes, you can claim HRA if you pay rent to your parents and they declare it as rental income in their tax returns. Under the new regime, no HRA exemption is allowed.
Can self-employed individuals claim HRA?
No, self-employed individuals do not receive HRA from an employer. However, they can claim deductions for rent paid under Section 80GG of the Income Tax Act if they opt for the old regime.
Can I claim both HRA and home loan interest deduction?
Under the old tax regime, yes, if you can justify paying rent while owning a home in a different city or due to job requirements. In the new tax regime, neither HRA nor home loan interest deductions are available.
What are the tax benefits of choosing the new regime without HRA and LTA?
The new tax regime offers lower tax rates compared to the old regime. If you do not have substantial deductions, the reduced tax rates may still be beneficial despite losing HRA and LTA exemptions.
Are metro city employees affected more by the removal of HRA exemption?
Yes, since metro city employees are eligible for a 50% HRA exemption under the old tax regime (compared to 40% for non-metros), they may face a higher tax burden under the new regime.
How does LTA exemption work under the old tax regime?
Under the old regime, LTA was tax-exempt for domestic travel expenses incurred during official leave, limited to two trips in a block of four years. This exemption is removed in the new regime.
Is the new tax regime mandatory for everyone?
No, taxpayers have the option to choose between the old and new tax regimes based on their financial situation. Salaried employees can switch annually, while business professionals have restricted flexibility.
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