HRA Deduction for Salaried Employees Under the New Tax Regime
HRA Deduction for Salaried Employees Under the New Tax Regime
The new tax regime, made the default option from FY 2023-24 under Section 115BAC, offers lower tax rates but eliminates most exemptions, including House Rent Allowance (HRA). For salaried individuals, this means a key tax-saving tool is no longer available. This article explains how HRA works (or doesn’t) in the new regime, compares it with the old system, and guides taxpayers on making the right choice.
What Is the New Tax Regime?
Introduced in 2020 and updated in Budget 2023 and 2024, the new regime provides simplified tax slabs with reduced rates:
| Income Range (₹) | Tax Rate |
|---|---|
| 0 – 3 lakh | 0% |
| 3 – 6 lakh | 5% |
| 6 – 9 lakh | 10% |
| 9 – 12 lakh | 15% |
| 12 – 15 lakh | 20% |
| Above 15 lakh | 30% |
A standard deduction of ₹75,000 (from FY 2024-25) and employer’s NPS contribution under Section 80CCD(2) are allowed. However, HRA exemption under Section 10(13A) is completely disallowed.
This is a major shift: in the old regime, HRA often reduced taxable salary by lakhs. In the new regime, every rupee of HRA is fully taxable.
How HRA Exemption Works in the Old Regime
Under the old regime, salaried employees living in rented homes can claim HRA exemption — the lowest of:
- Actual HRA received from the employer.
- 50% of (basic + dearness allowance) if living in metro cities (Delhi, Mumbai, Chennai, Kolkata); 40% for non-metro cities.
- Rent paid minus 10% of (basic + DA).
Example: Ms. Sharma lives in Delhi.
- Monthly basic + DA: ₹70,000
- HRA received: ₹30,000
- Rent paid: ₹35,000
Annual figures:
- HRA received: ₹3,60,000
- 50% of salary: ₹4,20,000
- Rent – 10% salary: ₹4,20,000 – ₹84,000 = ₹3,36,000
Exemption allowed: ₹3,36,000 (lowest amount) Taxable HRA: ₹24,000 only.
In the new regime, the entire ₹3,60,000 HRA is added to taxable income — increasing tax by ₹72,000–₹1,08,000 depending on the slab.
Why HRA Is Fully Taxable in the New Regime
The government’s intent is simplicity: lower rates in exchange for fewer deductions. CBDT has clarified (Circulars 2023–2024) that Section 10(13A) and Rule 2A do not apply under Section 115BAC. Employers must report full HRA as taxable salary in Form 16.
Who Benefits from the New Regime Despite No HRA?
- Employees with low or no rent (living with parents, company accommodation).
- Those with minimal investments (no 80C, no home loan interest).
- High-income earners where lower slab rates offset lost deductions.
Example: Mr. Rao earns ₹18 lakh (basic ₹10 lakh, HRA ₹4 lakh, rent ₹20,000/month).
- Old regime: HRA exemption ~₹2.4 lakh → tax ~₹3.12 lakh
- New regime: No HRA exemption → but lower rates → tax ~₹2.95 lakh
He saves ~₹17,000 by switching.
But for someone paying ₹40,000 rent in Mumbai with ₹25,000 HRA, the old regime saves more.
How to Choose the Right Regime
- Calculate taxable income under both regimes.
- Use ITR utility or online calculators.
- File Form 10-IEA to opt out of new regime (required if choosing old).
- Choice is annual and irrevocable (except for business income).
Compliance Tips
Even without exemption:
- Keep rent receipts and lease agreement.
- Submit landlord’s PAN if annual rent > ₹1 lakh.
- Verify Form 16 — HRA should not be shown as exempt.
Final Takeaway
The new tax regime does not allow HRA deduction. While it simplifies filing and reduces rates, it increases tax burden for renters in high-cost cities. Always compare both regimes before finalizing your return. For most salaried employees paying significant rent, the old regime remains more beneficial — unless other deductions are low.
Consult a chartered accountant or use official ITR tools to make an informed decision. Your tax strategy should align with your income, expenses, and financial goals. CA Prabhakar Gupta
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