New & Old Tax Regime to HRA Exemption for Salaried Persons
- Shyam Singh
- Nov 19
- 4 min read
The Indian Income Tax Act offers various deductions that enable salaried individuals to lower their taxable income. One prominent provision is the House Rent Allowance (HRA), which has traditionally been a popular exemption under the old tax regime. However, with the new tax regime introduced in 2020, there have been significant changes to how HRA is treated, with this new framework becoming the default option starting from FY 2023-24.
This article provides a comprehensive overview of the HRA rules applicable to salaried employees who opt for the new tax regime. It covers eligibility criteria, methods for calculating HRA, and essential practical considerations to keep in mind.
An Explainer for the New Tax Regime
The new tax regime under Section 115BAC offers reduced tax rates but eliminates most deductions and exemptions available in the old system. The key tax 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%
In the current tax regime, individuals are allowed a standard deduction of ₹50,000, which will increase to ₹75,000 starting from FY 2024-25. Additionally, contributions made by employers to the National Pension System (NPS) under Section 80CCD(2) remain permissible. However, it's important to note that the exemption for House Rent Allowance (HRA) under Section 10(13A) is not available in the new tax regime. Consequently, salaried employees cannot claim deductions for rent payments to lower their taxable income.
The Old Regime's HRA Exemption Rules
For example, under the old tax regime, the House Rent Allowance (HRA) exemption is calculated as the least of the following:
Actual House Rent Allowance (HRA) received from the employer.
For example, employees can claim 50% of their salary (basic + DA) if they live in metro cities (Delhi, Mumbai, Chennai, Kolkata), and 40% if they reside in non-metro cities.
The effective rent payment is calculated by deducting 10% of the individual's salary from the total rent amount.
Example: Mr A, residing in Mumbai, has a monthly basic salary plus DA of ₹60,000, receives an HRA of ₹25,000, and pays ₹30,000 as 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 substantially reduces taxable income
Consequences and Effects of the New Tax Regime
When a taxpayer opts for the new regime, the full amount of House Rent Allowance (HRA) becomes taxable as part of their salary income.
The old tax regime allows for a possible exemption of up to ₹3 lakh, provided certain conditions are met.
Under the new regime, no exemption is available; the entire ₹3 lakh is taxable as per the applicable slab rate.
Recent developments indicate that individuals living in high-rent urban areas may face increased tax liabilities due to changes in tax regulations. According to clarifications provided by the CBDT, such as those outlined in Circular No. 1/2024, HRA is now fully taxable under the new tax regime. This clarification is crucial for taxpayers to understand the full implications of their rental allowances on their overall tax obligations.
Choosing the Right Tax Regime: New vs. Old
Choose the new tax regime: if you have low deductions (e.g., you do not have a home loan, your under 80C investments are less than ₹1.5 lakh, and you pay minimal rent).
Choose the old regime: if you have a high HRA exemption potential (i.e., rent paid exceeds 10% of salary) and also claim other major deductions such as 80C, 80D, or home loan interest.
To ensure you maximise your tax savings, consider submitting Form 10-IEA to opt out of the new tax regime before filing your ITR. This is particularly beneficial if you find that the HRA exemption offers greater financial advantages than the reduced slab rates under the new regime.
Compliance and Required Documentation
It's important for employees to maintain certain documents for salary verification purposes, even if they are not eligible for tax exemptions. These documents include rent receipts, the landlord's PAN (which is necessary if the annual rent exceeds ₹1 lakh), and a valid lease agreement. Additionally, under the new tax regime, employers are required to report the total amount of Housing Rent Allowance (HRA) in Form 16.
Key Summary Points
Under the new tax regime, House Rent Allowance (HRA) deductions are no longer permitted, which means that this allowance will be fully taxable. While this change simplifies the compliance process, it may lead to an increased tax burden for individuals who are paying rent. It's important to evaluate both the old and new tax regimes annually by utilising income tax return (ITR) tools or calculators.
For the financial year 2024-25, take the time to assess your total income, any eligible deductions, and your annual rent obligations before making a decision about which tax regime to adopt. For tailored guidance, it's advisable to consult with a Chartered Accountant, as once a regime is selected for the financial year, it cannot be changed, except in specific circumstances related to business income.
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