Claiming HRA and LTA Deductions Under the New Tax Regime and Avoiding Section 143(2) Notices

The introduction of the new tax regime under Section 115BAC of the Income Tax Act in the 2020 Budget gave taxpayers the option to choose between the old tax regime and the new tax regime. One of the key differences between the two regimes is the availability of deductions. Under the new tax regime, taxpayers can enjoy reduced tax rates, but many popular exemptions and deductions, such as those for House Rent Allowance (HRA) and Leave Travel Allowance (LTA), are not allowed. This change has raised several questions for taxpayers, especially those who previously benefited from these exemptions. In this article, we’ll delve into whether HRA and LTA deductions are available under the new tax regime, the reasons behind their exclusion, and how you can avoid penalties, such as Section 143(2) notices, when filing under the new regime.

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Table of Contents

• Are HRA and LTA Deductions Allowed Under the New Tax Regime?

• Why Are HRA and LTA Deductions Not Available?

• How to Avoid Section 143(2) Notices When Filing Under the New Regime

• Key Points for Taxpayers

• Conclusion

• FAQs

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Are HRA and LTA Deductions Allowed Under the New Tax Regime?

The answer to whether House Rent Allowance (HRA) and Leave Travel Allowance (LTA) deductions are allowed under the new tax regime is no. One of the defining features of the new tax regime is that it offers lower tax rates in exchange for forgoing most tax exemptions and deductions. This includes popular deductions such as:

• HRA: Under the old tax regime, employees who pay rent and live in rented accommodation could claim HRA exemptions, which were based on their salary, rent paid, and location. However, under the new tax regime, this deduction is not available.
  

• LTA: Similarly, employees who incur travel expenses for family vacations within India could claim tax-free allowances under the LTA provision. However, this benefit is also not available under the new tax regime.
  

Therefore, while the new tax regime reduces your tax burden by offering lower tax rates, it removes the opportunity to claim these exemptions, which is an important factor for taxpayers to consider when deciding which regime to choose.

Why Are HRA and LTA Deductions Not Available?

The primary reason HRA and LTA deductions are not available under the new tax regime is to simplify the tax structure and reduce compliance burdens for taxpayers. By removing these deductions, the government has aimed to make tax filing more straightforward and efficient.

• Simplified Tax Filing: The new tax regime is designed to provide tax relief by offering lower tax rates without the need for taxpayers to track various exemptions, deductions, and their eligibility for them. This approach is intended to streamline the filing process and reduce the complexity of tax filing.
  

• Lower Tax Rates: The new regime's appeal lies in its lower tax rates compared to the old tax regime. In exchange for these reduced rates, taxpayers forgo several exemptions and deductions, including HRA, LTA, deductions under Section 80C, and other popular exemptions. The government has argued that the trade-off of a simplified filing process and lower rates outweighs the loss of these exemptions for the average taxpayer.
  

• Policy Shift: The exclusion of HRA and LTA from the new tax regime is part of a broader policy shift towards reducing individual tax rates and eliminating tax breaks that complicate tax filings. The objective is to make the tax system more transparent, ensuring that individuals benefit from lower tax rates while simplifying compliance.

How to Avoid Section 143(2) Notices When Filing Under the New Regime

Filing under the New Tax Regime: Avoiding Notices under Section 143(2)

Filing taxes under the new tax regime, introduced by the government to simplify the tax structure, has provided several advantages, including lower tax rates without the need for claiming deductions and exemptions. However, it also comes with its own set of challenges, especially for individuals who are unfamiliar with how these changes impact their tax filings. Section 143(2) of the Income Tax Act gives the Income Tax Department the authority to issue a notice for further scrutiny if there are discrepancies or mismatches in the filed returns. Receiving such a notice can be time-consuming and stressful, but it can be avoided by following key practices when filing your return under the new tax regime.

Let’s break down the critical steps you should follow to minimize the chances of receiving a Section 143(2) notice and ensure your tax filing process is smooth under the new regime.

1. Accurate Reporting of Information

The foundation of avoiding a Section 143(2) notice is ensuring that all the information you report on your ITR is accurate and complete. Under the new tax regime, you are not allowed to claim deductions or exemptions like you would under the old regime. However, this doesn’t mean that you can ignore the accuracy of the data you provide. Some key areas to focus on include:

• Income Reporting: Ensure that you report all sources of income correctly, including salary, business income, capital gains, and any other income earned during the financial year. Any discrepancies in income reporting could trigger an investigation.
  

• Deductions and Exemptions: Even though the new tax regime does not allow certain exemptions, ensure that you correctly account for deductions or exemptions that still apply (for example, those under Section 80CCD(2) for NPS contributions). Mistakes here could lead to a mismatch of tax calculations.
  

• Other Information: For example, if you're claiming HRA (House Rent Allowance) or other benefits allowed under the new regime, ensure that this information is consistent with your employer’s records and that you are within the permissible limits.

By double-checking the accuracy of all this data, you eliminate the possibility of filing an incorrect return that might invite further scrutiny.

2. Double-Check Eligibility for the New Tax Regime

One of the most common reasons for receiving a Section 143(2) notice under the new tax regime is the incorrect or inconsistent application of the new tax structure. The new tax regime offers lower tax rates but requires taxpayers to forgo various deductions and exemptions.

To avoid confusion:

• Eligibility: Ensure that you are eligible to choose the new tax regime. The new regime is optional, and it’s crucial that you understand whether or not it’s beneficial for your specific situation.
  

• Deductions You're Forgoing: The new tax regime requires you to forgo standard exemptions such as HRA (House Rent Allowance), LTA (Leave Travel Allowance), 80C deductions (like EPF, PPF), and others. Make sure that when you select the new regime, you acknowledge and confirm that you are giving up these deductions. If you mistakenly apply deductions you’re no longer entitled to, the Income Tax Department may flag this inconsistency.

If you're unsure about whether you qualify for the new tax regime, it’s best to consult a tax professional who can confirm your eligibility.

3. Reconcile TDS Credits with Your Return

One of the most frequent sources of discrepancies, especially under the new tax regime, is the mismatch of TDS (Tax Deducted at Source) credits. Employers or other organizations deduct tax at the source before paying you your income, and this TDS is reflected in your Form 26AS. However, if the TDS reflected in your Form 26AS is not correctly entered into your ITR, it can result in discrepancies.

• Verify TDS Information: Make sure that the TDS deducted by your employer or any other source matches what is reflected in your Form 26AS. Any missing or incorrect TDS entries could result in a Section 143(2) notice.
  

• Avoid Duplicate Entries: Also, ensure that the same TDS credit is not entered more than once or incorrectly reported under different income categories.

By ensuring that your TDS credits align with what is recorded in Form 26AS, you reduce the chances of being flagged for mismatches, which can lead to an investigation.

4. Ensure Correct Regime Selection

Another common pitfall under the new tax regime is incorrectly selecting the tax regime on your ITR. Since the new tax regime is optional, you must choose it when filing your return.

• Correct Section: Make sure you select the correct tax regime section while filing your ITR. This can be confusing, especially if you are accustomed to the old tax regime. Select "New Regime" carefully, and double-check that you are correctly forgoing the usual exemptions and deductions like HRA, LTA, and 80C.
  

• Acknowledging the Trade-Off: The new tax regime is structured to simplify the filing process by removing exemptions and deductions. However, this does not mean you can choose it without fully understanding what you are forfeiting. Failing to acknowledge the trade-off could lead to a mismatch of tax calculations, which may trigger a Section 143(2) notice.

5. File Timely and Accurately

Filing your return after the deadline or submitting incomplete documents can also increase the likelihood of receiving a Section 143(2) notice. Timely filing ensures that your return is processed on time, and the chances of missing any important documents are minimized.

• Meet the Deadlines: Ensure that your return is filed before the due date, which, for FY 2024-25, is September 15, 2025, for most taxpayers. Filing late or submitting incomplete returns can make your return more susceptible to scrutiny.
  

• Accurate Documentation: Along with timely filing, ensure that you submit all the necessary supporting documents. Missing documents or inconsistent details may raise red flags with the tax authorities.

By maintaining punctuality and thoroughness, you ensure that your return is processed without any unnecessary delays or issues.

6. Consult Tax Professionals if Unsure

Navigating the intricacies of the new tax regime can be challenging, especially if you're unfamiliar with the changes. Consulting a tax professional is one of the best ways to ensure that your filings are accurate and compliant. A tax professional can help you:

• Understand Complex Tax Regulations: If you're unsure about whether you qualify for the new regime or how it applies to your situation, a tax professional can provide expert advice and help you navigate through the filing process.
  

• Ensure Accuracy: Tax professionals can verify that you are claiming only the deductions you are entitled to and help avoid any potential discrepancies.

Having expert guidance reduces the risk of errors and ensures that you are compliant with the latest tax regulations, ultimately helping you avoid the risk of receiving a Section 143(2) notice.

Key Points for Taxpayers

When considering whether to opt for the new tax regime, here are some key points taxpayers should keep in mind:

• Lower Tax Rates: The new tax regime offers lower tax rates, which may be beneficial if you do not rely heavily on deductions and exemptions. If your primary concern is reducing your overall tax liability, this could be a good choice.
  

• No Deductions Available: Remember, under the new regime, deductions such as HRA, LTA, and those under Section 80C are not available. This is important for those who rely on these deductions to reduce their taxable income.
  

• Simplified Filing: The new regime simplifies the filing process by removing the need to keep track of various exemptions and deductions. This can make tax filing easier and less time-consuming.
  

• Personalized Decision: Whether the new tax regime is right for you depends on your income level and how much you benefit from exemptions and deductions. You may want to compare both regimes before making a final decision.
  

• Flexibility: Taxpayers have the option to switch between the new and old tax regimes every year, so it’s important to evaluate your situation annually to determine which regime offers the most benefit.

Conclusion

The new tax regime offers a simplified tax structure with lower tax rates, but it comes at the cost of forgoing certain exemptions and deductions, including HRA and LTA. These deductions, which many taxpayers rely on, are not available under the new regime. When deciding whether to opt for the new regime, it’s essential to carefully evaluate your income, deductions, and tax planning goals. If you’re unsure about which regime to choose or how the changes apply to your situation, consulting a tax professional can help you make an informed decision.

Frequently Asked Question (FAQs)

Q1: Does TaxBuddy offer both self-filing and expert-assisted plans for ITR filing, or only expert-assisted options?

Yes, TaxBuddy provides both self-filing and expert-assisted plans. If you are comfortable with the filing process, you can choose the self-filing option, which provides a guided platform to help you file your taxes accurately. For those who prefer professional assistance, TaxBuddy also offers expert-assisted plans, where tax professionals help you navigate the filing process and ensure compliance with the latest tax laws.

Q2: Where can I file my ITR?

You can file your ITR on the official Income Tax Department portal or use platforms like TaxBuddy. TaxBuddy offers a simplified and secure process with added support for taxpayers who require assistance during filing. The platform is designed to make tax filing easier for individuals, businesses, and professionals.

Q3: How can I track my income tax refund status?

You can track the status of your refund by visiting the official Income Tax Department portal. You’ll need to provide your PAN and the assessment year. TaxBuddy also offers an option to track your refund status through the platform, providing real-time updates to help you stay informed about the progress.

Q4: What is the penalty for filing ITR after the due date?

If you file your ITR after the due date, you will be subject to penalties. A late fee of up to ₹5,000 will apply, depending on when the return is filed. Additionally, you will be required to pay interest on any unpaid taxes under sections 234A, 234B, and 234C, which can increase the overall tax liability.

Q5: Can I file ITR after the deadline?

Yes, if you miss the deadline, you can still file a belated return. However, belated returns are subject to penalties and interest on unpaid taxes. The belated return can be filed until December 31 of the relevant assessment year. It's always best to file before the original or extended deadline to avoid these additional charges.

Q6: Is there a deadline extension for ITR filing for FY 2024-25?

Yes, the CBDT has extended the ITR filing deadline for FY 2024-25 (Assessment Year 2025-26) to September 15, 2025. This extension applies to individuals and non-audit assessees. Businesses requiring an audit have a later deadline of October 31, 2025. Ensure you file before the deadline to avoid penalties and interest.

Q7: Can I revise my ITR after filing?

Yes, if you discover any errors in your ITR after filing, you can file a revised return. The revised return should be filed before the end of the assessment year. This allows you to correct mistakes such as incorrect income reporting or missed deductions, helping to avoid penalties and potential issues with the tax authorities.

Q8: How can I avoid penalties while filing my ITR?

To avoid penalties, ensure that all the information on your ITR is accurate. File your return before the due date, report all income sources correctly, and claim valid deductions. Using platforms like TaxBuddy helps ensure error-free filing and minimizes the chances of triggering penalties or notices from the Income Tax Department.

Q9: What documents do I need to file my ITR?

The documents required to file your ITR typically include your PAN card, Form 16 (for salaried individuals), TDS certificates, bank statements, proof of deductions (e.g., NPS, 80C), and any other relevant documents like rent receipts or investment proof. TaxBuddy will guide you on exactly what documents are needed based on your specific tax situation.

Q10: How do I choose between the old and new tax regimes?

Choosing between the old and new tax regimes depends on your income, exemptions, and deductions. The old tax regime offers exemptions like HRA, LTA, and 80C deductions, but at higher tax rates. The new regime offers lower tax rates but removes most exemptions. Compare both regimes to calculate your tax liability and choose the one that gives you the maximum benefit.

Q11: Can I file my ITR using the JSON file?

Yes, you can file your ITR using the JSON (JavaScript Object Notation) file, which contains all the necessary details for your tax filing. The ITR utility provided by the Income Tax Department allows you to generate the JSON file after filling out the tax return form. TaxBuddy also supports filing via JSON files, making it easier for you to upload and submit your return with all the necessary data in place.

Q12: What are the benefits of filing ITR early?

Filing your ITR early ensures that your return is processed quicker, allowing you to receive your refund faster. It also gives you ample time to correct any errors or discrepancies if needed. Filing early reduces the last-minute rush and the possibility of missing the deadline, helping to avoid penalties and interest on unpaid taxes.