HRA in New Tax Regime

In the Old Tax Regime, salaried individuals could claim HRA exemption under Section 10(13A) of the Income Tax Act, reducing their taxable income. However, with the introduction of the New Tax Regime under Budget 2020, many traditional exemptions and deductions, including HRA benefits, have been revised.

Read on to learn about HRA's treatment under the New Tax Regime, and the eligibility criteria, and highlight how taxpayers can optimize their tax liabilities.

HRA Guidelines Under New Tax Regime

The New Tax Regime, first introduced in Budget 2020 and revised in Budget 2023, most exemptions and deductions available in the Old Tax Regime have been removed. This includes the HRA exemption under Section 10(13A) of the Income Tax Act, which is only available under the Old Tax Regime.

Key HRA Rules in the New Tax Regime:

1. No HRA Exemption – Salaried individuals who opt for the New Tax Regime cannot claim tax exemption on HRA, regardless of their rent payments.
2. Standardized Tax Slabs – The New Tax Regime offers lower tax rates, but in exchange, taxpayers lose the privilege of exemptions and deductions, including HRA.
3. Impact on Salary Structure – Since HRA is no longer tax-exempt, employees who live in rented accommodation may end up paying more tax under the New Tax Regime compared to the Old Tax Regime.
4. No Section 80GG Benefit – Individuals who do not receive HRA but still pay rent cannot claim a deduction under Section 80GG in the New Tax Regime.

HRA in Old Tax Regime

This exemption is provided under Section 10(13A) of the Income Tax Act, helping taxpayers reduce their taxable income based on their rent payments.

Key Rules for HRA Exemption in the Old Tax Regime:

1. HRA Exemption Formula – The amount of HRA you can exempt from taxes is the lowest of these three:
• Actual HRA received from the employer.
• 50% of salary (for metro cities) or 40% of salary (for non-metro cities).
• Rent paid minus 10% of salary.
2. Definition of Salary – For HRA calculation, salary includes basic pay + dearness allowance (if applicable) + commission (if on a fixed percentage basis).
3. Mandatory Rent Payments – HRA exemption can only be claimed if the taxpayer actually pays rent and provides valid rent receipts.
4. Exemption for Self-Employed or Those Without HRA – Individuals who do not receive HRA but still pay rent can claim a deduction under Section 80GG, subject to certain conditions.
5. Additional Benefits – Since the Old Tax Regime allows multiple deductions, salaried individuals can also claim standard deduction, 80C investments, medical insurance (80D), and home loan interest (24b) along with HRA.

If you are considering the Old Tax Regime over the New Tax regime for HRA exemption, check more on HRA rules, exemption limits & more from below:

Rules For HRA Deduction

House Rent Allowance (HRA) deduction is calculated based on specific rules under Section 10(13A) of the Income Tax Act.

HRA Rules for Metro vs. Non-Metro Cities

Example Calculation:

Let’s say an employee lives in Mumbai (Metro city) and has the following details:

• Basic Salary: ₹50,000 per month
• HRA Received: ₹20,000 per month
• Rent Paid: ₹18,000 per month

The HRA exemption will be the least of:

1. Actual HRA received = ₹20,000
2. 50% of salary = 50% of ₹50,000 = ₹25,000
3. Rent paid – 10% of salary = ₹18,000 - ₹5,000 = ₹13,000

HRA deduction allowed = ₹13,000 per month (Least value).

Suggested Read: Calculate Tax on Your Salary

Factors Determining HRA Deduction Amount

Let us look at the factors that will determine the deduction amount for the HRA :

1. Salary Amount – Higher salary increases the 50% / 40% limit for HRA deduction.
2. Metro vs. Non-Metro City – Metro city residents get a higher deduction limit (50% of salary vs. 40%).
3. Actual HRA Received – If an employee gets a lower HRA from their employer, the deduction is automatically limited.
4. Rent Paid – If rent is low, the deduction is reduced because it is capped at Rent paid – 10% of salary.
5. Proof of Rent Payment – To claim HRA, employees must submit rent receipts and the landlord’s PAN (if rent exceeds ₹1 lakh per year).

Eligibility for HRA

To avail HRA exemption, a taxpayer must meet the following criteria:

• Salaried Employee – Only individuals receiving HRA as part of their salary can claim this benefit.
• Must Live in a Rented House – HRA is applicable only if the individual pays rent; homeowners cannot claim this exemption.
• Rent Receipts are Mandatory – Employees must submit rent receipts as proof to avail of the tax exemption.
• Landlord’s PAN Required – If the annual rent exceeds ₹1 lakh, the taxpayer must provide the landlord’s PAN to claim the exemption.

HRA Exemption limit

The maximum exemption an individual can claim for House Rent Allowance (HRA) is determined by the least of the following three amounts:

1. Actual HRA received from the employer.
2. 50% of salary (for metro cities) or 40% of salary (for non-metro cities).
3. Rent paid minus 10% of salary.

HRA Calculation

Let’s take a practical example to understand how HRA exemption is calculated using the standard formula.

Example Calculation:

Suppose you live in Bangalore (a non-metro city) and have the following salary details:

• Basic Salary: ₹50,000 per month
• HRA Received: ₹22,000 per month
• Actual Rent Paid: ₹18,000 per month

Now, let’s calculate the HRA exemption:

• Actual HRA received (annually):

₹22,000 × 12 = ₹2,64,000

• Rent paid minus 10% of salary:

(₹18,000 × 12) – (10% of ₹6,00,000)

= ₹2,16,000 – ₹60,000

= ₹1,56,000

• 40% of Basic Salary (since Bangalore is a non-metro city):

(₹50,000 × 12) × 40% = ₹2,40,000

Since HRA exemption is the lowest of these three values, the tax-exempt amount will be ₹1,56,000.

Also Read: Tax on Rental Income

Steps to Claim HRA in ITR Filing

Employees can claim HRA exemption through the following methods:

1. Through Employer Submission – Salaried employees should declare HRA details to their employer at the start of the financial year. This ensures that the HRA exemption is reflected in Form 16, reducing taxable income.
2. Claiming Directly in ITR – If HRA was not declared earlier, it can still be claimed while filing the Income Tax Return (ITR). Employees need to manually enter the exempt amount and keep supporting documents for verification.
3. Using Online Tax Portals – Most tax filing platforms offer automated HRA exemption calculations. Employees must enter their salary and rent details to claim the deduction.
4. Retaining Documents for Verification – The Income Tax Department may request proof of HRA claims. It is advisable to keep rent receipts, lease agreements, and bank statements for at least six years for future reference.