House Rent Allowance (HRA exemptions) is a key component of the salary structure for many salaried employees in India. It provides significant tax benefits under the old tax regime. However, with the introduction of the new tax regime under the Finance Act 2020, taxpayers are faced with a crucial decision: stick with the old regime and continue claiming deductions, including HRA, or opt for the new regime with lower tax rates but without the majority of exemptions and deductions. This article delves into whether HRA exemptions can be claimed under the new tax regime and how to make the best choice for your financial situation.
Understanding HRA Exemptions in the Old Tax Regime
Under the old tax regime, HRA exemptions is allowed under Section 10(13A) of the Income Tax Act, 1961, read with Rule 2A. The exemption is calculated as the least of the following three amounts:
- Actual HRA received.
- 50% of salary (basic + DA) if living in a metro city (Delhi, Mumbai, Chennai, Kolkata) or 40% of salary if living in a non-metro city.
- Rent paid in excess of 10% of salary (basic + DA).
These provisions help reduce the taxable income for employees who are paying rent, thus lowering their tax liability.
HRA Exemptions in the New Tax Regime
The new tax regime, introduced in Budget 2020, offers lower tax rates across various income slabs but removes most exemptions and deductions available under the old regime. This includes exemptions for House Rent Allowance (HRA).
Key Features of the New Tax Regime:
- Lower Tax Rates: The new regime provides lower tax rates for various income slabs.
- No Exemptions or Deductions: Most of the popular exemptions and deductions, such as HRA, LTA, standard deduction, and those under Section 80C, 80D, and 80TTA, are not available.
- Simplicity: The regime is designed to simplify the tax filing process by eliminating the need to track multiple exemptions and deductions.
Since HRA exemptions is not available under the new tax regime, taxpayers must evaluate their tax liability under both regimes to decide which one is more beneficial.
Choosing Between the Old and New Tax Regimes
Factors to Consider:
- Income Level and Salary Structure:
- Employees with a significant portion of their salary constituting HRA and other allowances might benefit more from the old regime due to the available exemptions and deductions.
- For those with fewer exemptions and deductions, the new regime’s lower tax rates could be advantageous.
- Investment in Tax-Saving Instruments:
- Simplicity and Convenience:
- The new regime simplifies tax calculations and filing by removing the need to account for various exemptions and deductions.
- The old regime might be preferred by those who do not mind the complexity in exchange for potentially lower taxable income.
Comparative Example:
Let’s compare two scenarios to illustrate the decision-making process:
Scenario 1:
- Annual Income: ₹12,00,000
- HRA: ₹2,40,000
- Rent Paid: ₹2,40,000
- Other Deductions (Section 80C, 80D): ₹2,00,000
Old Regime:
- HRA Exemptions: ₹1,44,000 (assuming metro city)
- Other Deductions: ₹2,00,000
- Taxable Income: ₹8,56,000
New Regime:
- Taxable Income: ₹12,00,000
Tax rates will then be applied to these taxable income amounts to determine the actual tax liability under both regimes.
Conclusion
In the new tax regime, taxpayers cannot claim HRA exemptions. This shift requires careful evaluation of both tax regimes to determine which one offers the most tax savings based on individual financial circumstances and preferences. While the new regime offers simplicity with lower tax rates, the old regime can still provide significant tax benefits through exemptions and deductions, including HRA. Each taxpayer must weigh the pros and cons and consider their income structure, investments, and financial goals to make the best choice. Consulting with a tax professional can also provide personalized guidance tailored to your specific situation.
