HRA in New Tax Regime FY 2025-26 (AY 2026-27) – What Salaried Employees Need to Know

House Rent Allowance is a critical component of most salaried employees' compensation structure in India, traditionally offering significant tax-saving benefits. The shift to the new tax regime as the default option has fundamentally changed how this benefit works — and for many renters, this single change tips the regime decision in one direction or the other.

This page covers:

• What HRA is and how it traditionally worked
• Why HRA exemption is unavailable under the new tax regime
• What the new tax regime offers instead — slabs, rebate, and standard deduction
• How to compare old vs new regime if you pay significant rent
• Worked example — when paying rent makes the old regime more beneficial
• How HRA and home loan interest deductions interact across regimes

House Rent Allowance (HRA) is a critical component of a salaried employee's income structure in India. It is designed to help employees manage the cost of rented accommodation while offering significant tax-saving benefits under the traditional tax framework. However, with the introduction of the new tax regime — now the default option from FY 2023-24 onward — the rules surrounding HRA exemptions have undergone a fundamental shift.

Under the new tax regime, the House Rent Allowance exemption is not available for salaried individuals. Unlike the old tax regime, where a portion of HRA could be exempted from tax under Section 10(13A), the entire HRA amount is fully taxable as part of your salary in the new regime.

The new tax regime, introduced under Section 115BAC, was designed around a fundamentally different philosophy than the old regime — offering lower headline tax rates in exchange for removing most exemptions and deductions, including HRA, LTA, and the various Section 80C/80D investment-linked deductions. The trade-off is structural: you gain lower slab rates and a higher standard deduction, but lose the ability to reduce taxable income through specific allowances and investments — HRA being one of the most financially significant of these for renters.

For FY 2025-26 (AY 2026-27), the new tax regime offers:

The combination of lower slabs and the higher Rs. 12 lakh effective tax-free threshold makes the new regime genuinely attractive for many taxpayers — but specifically not for those with substantial HRA claims, large home loan interest payments, or significant Section 80C investments.

If you pay substantial rent and are deciding between regimes, the comparison comes down to a fairly direct calculation: does your HRA exemption (under the old regime), combined with any other deductions you would claim, save you more tax than the new regime's lower slabs and higher standard deduction?

As a general guide:

• If your HRA exemption alone is modest, and you have few other deductions, the new regime's lower rates likely result in less overall tax
• If your HRA exemption is substantial — common in metro cities where rent and the corresponding HRA component tend to be higher — combined with Section 80C investments and any home loan interest, the old regime may still result in lower overall tax liability

Consider a salaried employee in Mumbai earning Rs. 15 lakh annually, paying Rs. 30,000 monthly rent, with a basic salary of Rs. 6 lakh and HRA of Rs. 3 lakh.

Under the old regime:

• HRA exemption (calculated as the least of: actual HRA Rs. 3,00,000; rent paid minus 10% of basic, i.e., Rs. 3,60,000 - Rs. 60,000 = Rs. 3,00,000; or 50% of basic for metro, Rs. 3,00,000) = Rs. 3,00,000 exempt
• Combined with Section 80C investments of Rs. 1.5 lakh and standard deduction of Rs. 50,000
• Taxable income reduces substantially below the gross Rs. 15 lakh

Under the new regime:

• No HRA exemption — the full Rs. 3 lakh HRA remains taxable
• Standard deduction of Rs. 75,000 applies, but no other deductions are available
• Taxable income remains significantly higher than under the old regime calculation

For this specific profile — high rent in a metro city, combined with disciplined 80C investment — the old regime often results in meaningfully lower tax liability, despite its higher headline slab rates. Every individual's specific numbers will differ, so running both calculations using the Income Tax Department's online comparison tool before deciding is strongly recommended.

A relevant scenario for many salaried employees: if you are paying rent in one city while servicing a home loan for a property in another city (or one that is still under construction), the old regime allows you to claim both HRA exemption and home loan interest deduction under Section 24(b) simultaneously, subject to the applicable conditions and caps for each. The new regime allows neither.

This combined scenario — renting while also paying a home loan — is one of the clearest cases where the old regime's deduction-rich structure can outweigh the new regime's lower rates, making it worth a careful side-by-side calculation rather than assuming the new regime's lower headline rates automatically result in lower tax.

Choosing between the old and new tax regime is genuinely worth recalculating each year, particularly if your rent, home loan interest, or investment pattern changes. Bajaj Housing Finance offers home loans from 7.25% p.a.* p.a.* with amounts up to Rs. Rs. 15 Crore* and tenures up to 32 years years — and if the old regime suits your situation, Section 24(b) interest deduction adds further tax efficiency to your home loan. Check your eligibility today.