The Indian Income Tax Act offers various deductions to reduce taxable income for salaried individuals. House Rent Allowance (HRA) is a popular exemption under the old tax regime, but its availability changes significantly in the new tax regime introduced in 2020 and made default from FY 2023-24. This article explains HRA rules for salaried employees opting for the new regime, eligibility criteria, calculation methods, and practical implications.
Understanding the New Tax Regime
The new tax regime under Section 115BAC provides lower tax rates but foregoes most deductions and exemptions available in the old regime. Key slabs for FY 2024-25 (AY 2025-26) are:
- Up to ₹3 lakh: Nil
- ₹3-6 lakh: 5%
- ₹6-9 lakh: 10%
- ₹9-12 lakh: 15%
- ₹12-15 lakh: 20%
- Above ₹15 lakh: 30%
Standard deduction of ₹50,000 (₹75,000 from FY 2024-25) and employer NPS contributions under Section 80CCD(2) remain allowed. However, HRA exemption under Section 10(13A) is not available in the new regime. Salaried persons cannot claim rent paid as a deduction to lower taxable salary.
HRA Exemption in the Old Regime (For Comparison)
In the old regime, HRA exemption is the least of:
1. Actual HRA received from employer.
2. 50% of salary (basic + DA) for metro cities (Delhi, Mumbai, Chennai, Kolkata); 40% for non-metros.
3. Actual rent paid minus 10% of salary.
Example: Mr. A in Mumbai earns ₹60,000 basic + DA monthly, receives ₹25,000 HRA, and pays ₹30,000 rent.
- Actual HRA: ₹3,00,000 (annual)
- 50% salary: ₹3,60,000
- Rent – 10% salary: ₹3,60,000 – ₹72,000 = ₹2,88,000
- Exemption: ₹2,88,000 (least)
Taxable HRA: ₹12,000.
This reduces taxable income substantially.
Implications Under New Regime
Opting for the new regime means full HRA becomes taxable as part of salary. For someone receiving ₹3 lakh HRA annually:
- Old regime: Possible exemption up to ₹3 lakh (conditions met).
- New regime: ₹0 exemption; entire ₹3 lakh taxed at applicable slab.
This increases tax liability, especially for high-rent urban dwellers. CBDT clarifications (e.g., Circular No. 1/2024) confirm HRA is fully taxable in new regime.
Who Should Opt for New vs. Old Regime?
- Choose new regime if: Low deductions (e.g., no home loan, investments <₹1.5 lakh under 80C, minimal rent). Lower rates often yield savings.
- Stick to old regime if: High HRA exemption potential (rent >10% salary), other deductions like 80C, 80D, home loan interest.
Use Form 10-IEA to opt out of new regime before filing ITR if HRA benefits outweigh slab reductions.
Documentation and Compliance
Even without exemption, maintain rent receipts, landlord PAN (if rent >₹1 lakh/year), and lease agreement for salary slip verification. Employers report full HRA in Form 16 under new regime.
Conclusion
HRA deduction is unavailable under the new tax regime, making the entire allowance taxable. This simplifies compliance but raises taxes for renters. Compare both regimes annually using ITR utilities or calculators. For FY 2024-25, evaluate total income, deductions, and rent paid. Consult a CA for personalized advice, as regime choice is irrevocable for the year (except business income cases).
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