HRA in New Tax Regime FY 2025-26 (AY 2026-27)

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 accommodations while offering significant tax-saving benefits. However, with the introduction of the new tax regime in the financial year 2020-21, the rules surrounding HRA exemptions have undergone a major shift. This article delves into the specifics of HRA under both the old and new tax regimes, providing a comprehensive comparison to help you make informed decisions.

House Rent Allowance (HRA) is an allowance provided by employers to salaried employees to cover their rental expenses. It is a part of the employee's salary package and is partially or fully exempt from income tax, subject to specific conditions.

The primary purpose of HRA is to assist employees in meeting their housing costs, especially in urban areas where rents can be significantly high. The extent of HRA exemption depends on factors such as the employee’s salary, the city of residence, and the actual rent paid.

Under the Income Tax Act, HRA is governed by Section 10(13A) and Rule 2A, which outline the rules for claiming tax exemptions.

Under the old tax regime, salaried individuals can claim HRA exemptions if they meet the following conditions:

• The employee resides in a rented house.
• The employee receives HRA as part of their salary package.
• The rent paid exceeds 10% of the employee’s basic salary.

The exemption amount is calculated as the least of the following:

1. 50% of basic salary (for metro cities like Delhi, Mumbai, Kolkata, and Chennai) or 40% of basic salary (for non-metro cities).
2. Actual rent paid minus 10% of basic salary.
3. Actual HRA received.

Example:

Let us consider a salaried individual living in a metro city with the following details:

• Basic salary: Rs. 50,000 per month
• HRA received: Rs. 20,000 per month
• Rent paid: Rs. 25,000 per month

HRA exemption calculation:

1. 50% of basic salary: Rs. 25,000
2. Rent paid minus 10% of basic salary: Rs. 25,000 - Rs. 5,000 = Rs. 20,000
3. Actual HRA received: Rs. 20,000

In this case, the HRA exemption will be Rs. 20,000, as it is the least of the three amounts.

Yes, you can claim HRA without rent receipts, but only if the monthly rent does not exceed Rs. 3,000. For rent amounts above Rs. 3,000 per month, submitting valid rent receipts is mandatory.

A valid rent receipt should include the following details:

• The landlord’s name and address
• The rent amount paid
• The duration of the rental period
• The landlord’s PAN (if the annual rent exceeds Rs. 1 lakh)

Rent receipts act as proof of payment and are essential for claiming HRA exemptions during income tax filing.

The new tax regime, introduced in FY 2020-21, does not allow exemptions or deductions for HRA. This is because the new regime was designed to simplify tax filing by eliminating most exemptions and deductions, including those under Section 10(13A).

While the lack of HRA exemptions may seem like a disadvantage, the new tax regime offers reduced tax rates across income slabs. This simplified structure benefits individuals who do not claim multiple exemptions or deductions.

For salaried individuals paying high rent, the old tax regime may still be more beneficial due to the availability of HRA exemptions.

The table below provides a clear comparison of HRA benefits under the old and new tax regimes:

Key Takeaways:

• The old tax regime is advantageous for employees paying high rent, as it allows HRA exemptions.
• The new tax regime is ideal for individuals seeking a simplified tax structure with lower tax rates.

Conclusion

Choosing between the old and new tax regimes depends on your financial situation and the exemptions or deductions you wish to claim. While the old regime offers HRA exemptions and other benefits, the new regime simplifies tax filing with reduced tax rates. Evaluate your income, expenses, and tax-saving goals carefully before making a decision.

If you are looking for financial solutions to manage your expenses or plan for the future, Bajaj Finserv offers a range of products, including personal loans and home loans, tailored to your needs. Explore our offerings today and take the first step towards financial freedom.

Popular calculators for your financial calculations