Claiming HRA Exemption Under the New Tax Regime for FY 2024-25 and Avoiding Section 143(2) Scrutiny

House Rent Allowance (HRA) exemption is a valuable benefit for salaried individuals who live in rented accommodation. The benefit allows you to reduce your taxable income by the amount of rent you pay, subject to certain conditions. However, with the introduction of the new tax regime in FY 2024-25, many taxpayers wonder whether they can still claim HRA exemption. This is particularly important for those who have been claiming this exemption under the old tax regime. Let us explore the eligibility for claiming HRA under the new tax regime, discuss what happens if you wrongly claim this exemption, highlight key differences between the old and new tax regimes, and provide tips to avoid scrutiny under Section 143(2). We will also delve into the latest updates for FY 2024-25 and clarify the best approach for claiming HRA exemption.

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Table of Contents

• Can You Claim HRA Exemption Under the New Tax Regime?

• What Happens If You Wrongly Claim HRA Exemption Under the New Regime?

• Key Differences: Old vs. New Regime (FY 2024-25)

• How to Avoid Section 143(2) Scrutiny

• Latest Updates for FY 2024-25

• Conclusion

• FAQs

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Can You Claim HRA Exemption Under the New Tax Regime?

The new tax regime, introduced in FY 2020-21, offers reduced tax rates but does not allow taxpayers to claim various deductions and exemptions available under the old tax regime. Unfortunately, the option to claim HRA exemption is one of the key deductions that is not available under the new tax regime.

HRA exemption is only available under the old tax regime, where taxpayers can claim deductions on the rent they pay, subject to certain conditions, such as the city of residence and their salary structure. However, under the new tax regime, individuals opting for lower tax rates must forgo exemptions like HRA, standard deduction, and deductions under Section 80C, among others.

So, if you have chosen the new tax regime for FY 2024-25, you will not be able to claim HRA exemption. The decision between the old and new tax regimes requires careful consideration of various exemptions and deductions that may be relevant to your financial situation.

What Happens If You Wrongly Claim HRA Exemption Under the New Regime?

Claiming HRA exemption under the new tax regime is not permissible. If you mistakenly claim this exemption, you could face several issues:

• Tax Liability Adjustments: The Income Tax Department may adjust your tax liability if you are found to have claimed HRA exemption under the new tax regime. This could result in a higher tax liability once the mistake is detected.
  

• Section 143(1) Adjustments: If the Income Tax Department identifies the error, they may make adjustments under Section 143(1) (intimation). This could lead to additional tax being levied, along with interest for underpayment of taxes.
  

• Scrutiny under Section 143(2): If the incorrect claim is deemed substantial, the Income Tax Department may initiate a more detailed scrutiny under Section 143(2), which could involve a review of your ITR and additional documentation requests. The process of scrutiny is time-consuming and may require you to provide additional details or rectify the mistake.

To avoid such complications, it is essential to choose the correct tax regime and ensure that all exemptions, including HRA, are claimed according to the rules. Consulting a tax professional is always a good idea to ensure compliance.

Key Differences: Old vs. New Regime (FY 2024-25)

The key differences between the old and new tax regimes for FY 2024-25 primarily revolve around the available exemptions and deductions. Here are the main points of distinction:

• Tax Rates:
  

• Old Tax Regime: Higher tax rates but allows a wide range of exemptions and deductions.
  

• New Tax Regime: Lower tax rates, but most exemptions and deductions (like HRA, standard deduction, and 80C deductions) are not available.
  

• Exemptions and Deductions:
  

• Old Tax Regime: Allows various deductions like HRA, standard deduction, deductions under Section 80C (for investments like PPF, life insurance premiums), and more.
  

• New Tax Regime: Does not allow most exemptions or deductions, including HRA, 80C deductions, and deductions for home loan interest, making it simpler but less beneficial for those with significant deductions.
  

• Choice of Regime:
  

• Old Tax Regime: Taxpayers can claim deductions for expenses like medical insurance premiums, education loans, and HRA.
  

• New Tax Regime: Offers lower tax rates, but sacrifices many tax-saving opportunities available under the old regime.

The choice between the old and new tax regimes depends on the taxpayer’s individual situation, such as their deductions, exemptions, and overall income. For individuals with substantial exemptions like HRA, the old tax regime may be more beneficial.

How to Avoid Section 143(2) Scrutiny

Section 143(2) scrutiny can be triggered if the Income Tax Department finds significant discrepancies or incorrect claims in your return. Here’s how you can avoid it:

File Accurate Returns:

Filing an accurate tax return is the most important step in ensuring that your taxes are filed without triggering scrutiny or penalties. Accuracy is key when reporting your income, deductions, and exemptions. It’s essential to double-check the details provided in your return before submission to avoid mistakes.

Start by verifying all the income sources that you are reporting, including salary, business income, interest, or any other forms of income. Be sure to include all relevant details, such as the TDS (Tax Deducted at Source) that has been deducted from your income, as this amount will be used to calculate the taxes you owe. Any mismatch in the reported income or TDS could lead to errors that attract scrutiny.

Pay special attention to the deductions and exemptions you are claiming. For example, under the new tax regime, individuals are not allowed to claim exemptions such as House Rent Allowance (HRA). If you mistakenly claim such exemptions when you're not eligible for them, it could trigger a notice from the Income Tax Department. Ensure that only valid deductions and exemptions are included in your return, such as those under Sections 80C, 80D, and others that apply to your specific financial situation.

Accurate returns not only prevent unnecessary scrutiny but also ensure that you do not end up paying more or less tax than you are liable for. Mistakes can also delay your refunds, and in some cases, could lead to fines, penalties, or further scrutiny under Section 143(2).

Reconcile TDS:

The Tax Deducted at Source (TDS) is a significant element in the filing of your tax returns. It is important to ensure that the TDS on your income matches the details provided by your employer or any other deductors. Often, your employer or financial institutions deduct tax on your behalf, and this amount is later reflected in your Form 26AS.

Before filing your return, check that the TDS reflected in your Form 26AS matches the TDS details that you have reported in your return. Discrepancies between these figures are a common cause for scrutiny notices. If the TDS deducted by your employer does not match the TDS amount in your return, the Income Tax Department may flag this discrepancy for further investigation.

To avoid such issues, always cross-verify your TDS details with the Form 26AS, which can be accessed via the Income Tax Department’s e-filing portal. If you find any discrepancies or missing entries, contact the deductor immediately to have them corrected. Failing to do so could lead to penalties and delays in processing your tax return.

Maintain Supporting Documents: It is essential to maintain proper records of all supporting documents related to the deductions and exemptions you claim. The Income Tax Department may request these documents during the scrutiny process, especially if any discrepancies arise. Some of the critical documents include:

• Rent Receipts for HRA Claims: If you're claiming House Rent Allowance (HRA), you need to maintain valid rent receipts along with a copy of your rental agreement. These documents are required to substantiate your HRA claims, and failure to provide them could lead to the disallowance of the deduction.
  

• Investment Proofs for Section 80C: For claiming deductions under Section 80C (such as for investments in PPF, ELSS, NSC, and others), keep proofs of your investments. This includes receipts or certificates of investments made, as well as documentation of the amount deposited in these schemes.
  

• Medical Insurance Proofs for Section 80D: If you're claiming deductions for medical insurance premiums, you should keep all related documents, such as premium payment receipts and policies.

By keeping these documents organized and easily accessible, you can quickly respond to any inquiries from the Income Tax Department and avoid unnecessary delays in the scrutiny process. Having these documents ready also helps to substantiate your claims, reducing the chances of your return being flagged for further verification.

File Timely Returns:

Filing your return within the due date, including any extensions granted, is crucial to ensuring that your tax filing is processed smoothly. Filing on time can reduce the likelihood of your return being subjected to scrutiny. When you file your return late, the chances of triggering further verification or additional scrutiny increase significantly.

Late filing can also result in penalties, interest on any unpaid taxes, and delays in processing your refund. Moreover, if you file late, your return might be flagged by the Income Tax Department, which could lead to a more in-depth examination. To avoid this, always strive to file your return as early as possible, ideally well before the deadline or extension period ends.

Filing on time also ensures that you meet other tax obligations, such as the payment of advance tax, if applicable. If you miss the deadline, you may lose the opportunity to adjust any tax liabilities or benefit from early filing advantages, such as faster refunds.

Consult a Tax Professional:

If you're unsure about any aspect of your tax return, it’s always a good idea to consult a tax professional. Filing a tax return can be complex, especially when dealing with multiple sources of income, various deductions, or exemptions. A professional can help you navigate the intricacies of tax law, ensure that all your claims are valid, and prevent any errors that could trigger scrutiny or lead to penalties.

Tax professionals can also provide personalized guidance based on your financial situation, helping you optimize your tax filings and identify opportunities for tax-saving strategies. Their expertise can ensure that you’re compliant with all the latest regulations and filing requirements, minimizing the risk of errors and increasing the accuracy of your return.

If you're unsure about specific claims or deductions, or if your filing involves complex issues like capital gains, rental income, or business income, a tax professional can provide the clarity and assurance needed to file accurately and confidently.

By being thorough and cautious in your filing process, you can minimize the risk of Section 143(2) scrutiny. Taking these steps ensures that your return is filed correctly, reducing the chances of errors and avoiding unnecessary delays or penalties. Always stay ahead of deadlines, maintain accurate records, and consult with professionals when needed to keep the process smooth and error-free.

Latest Updates for FY 2024-25

For the Financial Year 2024-25, there are several key updates that impact taxpayers under both the old and new tax regimes:

• Revised ITR Forms: The ITR forms have undergone significant changes, and taxpayers must use the latest version to ensure accurate filing. These revisions aim to simplify compliance and increase transparency.
  

• Updated Tax Slabs: The tax slabs for both the old and new regimes have been revised, with enhanced exemptions under the old regime for senior citizens and additional deductions available for taxpayers in the new regime.
  

• TDS Updates: The updates to TDS norms, particularly around the timing of TDS credit reflection, may affect how taxpayers file their returns. The tax department is working to ensure that TDS credits are properly reflected in the system for accurate filings.
  

• Increased Focus on Compliance: With the introduction of more detailed ITR forms, the Income Tax Department is focusing more on ensuring that all claims are legitimate and accurate, which has been a part of the move to bring more transparency into the system.

Taxpayers need to stay updated with these changes to avoid errors in their filing and to ensure they are taking advantage of all available tax benefits.

Conclusion

Claiming HRA exemption under the new tax regime is not possible, as the new regime offers lower tax rates but eliminates many key deductions and exemptions. If you mistakenly claim HRA exemption under the new regime, you risk penalties, interest, and possible scrutiny. To avoid complications, carefully consider the benefits of the old and new tax regimes before filing. Staying informed about the latest updates and consulting with a tax professional can help you navigate these changes successfully.

FAQs

Q1: Can I claim HRA exemption under the new tax regime? No, HRA exemption is only available under the old tax regime. The new tax regime provides lower tax rates but does not allow exemptions such as HRA, standard deduction, or deductions under Sections 80C and 80D.

Q2: What happens if I mistakenly claim HRA exemption under the new tax regime? If you incorrectly claim HRA exemption under the new regime, the Income Tax Department may levy penalties, charge interest on unpaid taxes, and initiate scrutiny under Section 143(2). It's essential to ensure the proper regime is selected to avoid such issues.

Q3: How do I choose between the old and new tax regimes? Choosing between the old and new tax regimes depends on your financial situation. The old regime allows for deductions like HRA, 80C, and more, but comes with higher tax rates. If you have significant deductions, the old regime might be better. However, if you have fewer deductions, the new tax regime with lower tax rates could be more advantageous.

Q4: What are the key differences between the old and new tax regimes? The primary difference is that the old regime allows deductions for various exemptions like HRA, 80C, and others, whereas the new regime offers lower tax rates but removes most exemptions and deductions. The new tax regime is simpler, as it requires no record-keeping for claims, but might not be as beneficial for those with substantial deductions.

Q5: How can I avoid scrutiny under Section 143(2)? To avoid scrutiny, ensure that your return is accurate and filed on time. Maintain proper documentation to support your deductions and exemptions. If you file your return correctly and on time, the chances of facing scrutiny are significantly reduced.

Q6: Can I file a revised return if I claim HRA under the new tax regime by mistake? Yes, you can file a revised return to correct mistakes, including incorrectly claiming ineligible exemptions like HRA. Revised returns should be filed before the end of the assessment year, and you should ensure that the correction is accurately made to avoid penalties or further issues.

Q7: Are there any changes in ITR forms for FY 2024-25? Yes, there have been updates in the ITR forms for FY 2024-25 to improve transparency, make filing easier, and reduce errors. These changes are aimed at simplifying the tax filing process and ensuring better compliance, especially for taxpayers who are used to the older forms.

Q8: Can I claim both HRA exemption and deductions under the new tax regime? No, under the new tax regime, you cannot claim both HRA exemptions and deductions like 80C. The new tax regime offers reduced tax rates in exchange for forgoing most exemptions and deductions. If you want to claim HRA or deductions, you must opt for the old tax regime.

Q9: How do I calculate HRA exemption under the old tax regime? HRA exemption is calculated based on the rent you pay, your salary, and the city in which you live. The exemption is determined using the following formula:

• Actual HRA received
  

• Rent paid minus 10% of salary
  

• 50% of salary (if you live in a metro) or 40% of salary (for non-metros)
  

The least of these values is the HRA exemption.

Q10: How does the revised tax slab affect my HRA exemption claim? The revised tax slab does not directly affect your HRA exemption. HRA is still available under the old tax regime, which applies regardless of the updated tax slabs. However, if you switch to the new tax regime, you won’t be able to claim the HRA exemption.

Q11: What documents should I keep to support my HRA claim? To support your HRA claim, you should maintain rent receipts, lease agreements, a salary slip showing the HRA received, and details of your landlord. Additionally, if your rent exceeds ₹1 lakh per annum, it is necessary to provide the landlord’s PAN number as part of your documentation.

Q12: Is there any impact of the latest updates on my HRA exemption? The latest updates to tax laws do not affect the HRA exemption under the old tax regime. However, any changes to TDS and ITR forms may impact how you report your HRA claim. It’s important to stay updated on the latest ITR form versions to ensure accurate filing.