Claiming HRA and LTA Deductions in the New Tax Regime for FY 2024-25 and Handling Section 142(2A) Audits
- Bhavika Rajput
- Jun 2
- 8 min read
The new tax regime for FY 2024-25 has altered how various deductions and exemptions are treated, especially for popular benefits like House Rent Allowance (HRA) and Leave Travel Allowance (LTA). These deductions, which were available under the old tax regime, are no longer accessible in the new regime. This change impacts those who rely on these exemptions to reduce their taxable income. Additionally, taxpayers may be subject to a Section 142(2A) audit if there are discrepancies in their financial reporting. Let us explore the implications of these changes, the conditions for opting between the tax regimes, and the procedures for handling a Section 142(2A) audit effectively.
Table of Contents
Claiming HRA and LTA Deductions in the New Tax Regime
Under the new tax regime for FY 2024-25, the government has reduced tax rates across various income slabs but has removed most exemptions and deductions to simplify the tax process. This includes the elimination of the House Rent Allowance (HRA) exemption and the Leave Travel Allowance (LTA) exemption. Taxpayers who opt for the new regime must forgo these deductions in exchange for a simplified tax calculation and lower tax slabs. The new regime is ideal for those who do not have significant exemptions to claim or those who prefer the ease of a tax structure without complex calculations. However, if a taxpayer wishes to claim HRA or LTA, they must opt for the old tax regime, which still allows these deductions.
Is HRA or LTA Allowed in the New Tax Regime for FY 2024-25?
No, both HRA and LTA exemptions are not available under the new tax regime for FY 2024-25. The new regime was designed to reduce tax complexity by eliminating most exemptions and deductions. Consequently, taxpayers opting for this regime will lose out on these allowances, which were previously available under the old tax regime. For instance, HRA, which is granted to employees who live in rented accommodation, and LTA, which covers travel expenses for employees and their families, will no longer be applicable. Therefore, anyone interested in these exemptions must choose the old tax regime at the time of filing their ITR.
Alternatives to HRA and LTA in the New Tax Regime
While HRA and LTA deductions are not available in the new tax regime, there are a few alternatives that taxpayers can still benefit from. One such alternative is the standard deduction, which is available under the new tax regime for salaried individuals and pensioners. This deduction amounts to ₹50,000 and can help reduce the taxable income to some extent. However, this standard deduction does not compensate for the loss of the HRA and LTA exemptions. Additionally, certain other allowances like children's education, medical reimbursement, and professional tax are also not deductible under the new regime. Hence, for taxpayers who rely on these allowances, the old tax regime may still be a better choice.
Handling Section 142(2A) Audits in FY 2024-25
Section 142(2A) of the Income Tax Act allows the Assessing Officer (AO) to order a special audit if they suspect that the taxpayer's accounts are complex or there are doubts regarding the correctness of the financials, income, or asset valuations. This audit is typically triggered when discrepancies are found in the filed tax returns or in the records of the taxpayer's business or personal finances. If this audit is ordered, the taxpayer is required to have their accounts audited by a chartered accountant or a cost accountant nominated by the tax authorities. The cost of the audit is generally borne by the Central Government. The audit is an important process that ensures the accuracy and transparency of financial records and compliance with the tax laws.
When Can a Section 142(2A) Audit Be Ordered?
A Section 142(2A) audit can be ordered under the following circumstances:
Complexity of Accounts: If the taxpayer's accounts are too complicated or intricate for the regular assessment procedure.
Doubts About Correctness: When the Assessing Officer has doubts about the accuracy of the reported income or asset valuation.
Inventory Valuation Issues: If there are discrepancies or unclear valuation of inventory, recent amendments have allowed cost accountants to audit such valuations to ensure fairness and prevent tax evasion.
This provision ensures that if the AO feels that the submitted returns or financial records are not clear or complete, they can direct an audit to get a clearer picture.
Key Procedures for Section 142(2A) Audits
When a Section 142(2A) audit is ordered, the following steps are involved:
Opportunity to Be Heard: The taxpayer must be given a chance to explain their position before the audit is initiated. This ensures fairness in the process.
Appointment of Auditor: The AO will appoint a chartered accountant or cost accountant to conduct the audit.
Audit Costs: The audit expenses are generally borne by the government, with the cost being determined by the tax authorities.
Time Limits: The appointed auditor must submit the audit report within 180 days from the date of the audit order.
Submission Format: The audit report must be submitted in Form 6B, digitally signed by the appointed auditor. This ensures the authenticity and official nature of the report.
Recent Amendments in Section 142(2A) for FY 2024-25
Recent amendments to Section 142(2A) have made significant changes, particularly concerning the role of cost accountants in auditing inventory valuation. Under the new amendments, cost accountants are now authorized to conduct special audits focused on inventory valuation, especially where discrepancies in asset valuation are suspected. This change aims to enhance transparency and ensure that businesses report inventory accurately, minimizing the risk of undervaluation and tax evasion. These amendments are part of the government's broader efforts to streamline audits and improve tax compliance.
Conclusion
The new tax regime for FY 2024-25 simplifies tax calculations by removing many exemptions and deductions, including HRA and LTA. While this offers lower tax rates, it may not be suitable for those who rely on these deductions to lower their taxable income. If you are faced with a Section 142(2A) audit, it's essential to understand the procedures, your rights, and the steps involved in complying with the audit process. For anyone looking for assistance in tax filing, it is highly recommended to download the TaxBuddy mobile app for a simplified, secure, and hassle-free experience.
FAQs
Can I claim HRA or LTA if I choose the new tax regime for FY 2024-25?
No, under the new tax regime, both HRA and LTA exemptions are not available. The new tax regime simplifies the tax calculation by removing most exemptions and deductions, including the ones for HRA under Section 10(13A) and LTA under Section 10(5). If you want to claim these deductions, you must opt for the old tax regime while filing your ITR.
What triggers a Section 142(2A) audit?
A Section 142(2A) audit is triggered when the Assessing Officer (AO) finds discrepancies in the taxpayer’s income, assets, or liabilities or suspects that the accounts are too complex for regular assessment. If the AO doubts the correctness or completeness of the financial records, an audit may be ordered. Factors like inconsistent reporting of income, asset misvaluation, or errors in deduction claims can prompt the initiation of this special audit.
Who pays for the Section 142(2A) audit?
The government bears the cost of a Section 142(2A) audit. The tax authorities determine the audit expenses, and the government is responsible for covering the costs, ensuring that taxpayers are not burdened with financial responsibilities for audits ordered by the Income Tax Department. This rule applies to audits ordered after June 1, 2007.
How long do I have to submit the special audit report?
The special audit report must be submitted within 180 days from the date the audit order is issued. This period allows the appointed auditor enough time to thoroughly assess the taxpayer’s accounts and financial records. The report must then be submitted in Form 6B, digitally signed by the nominated auditor, ensuring its authenticity.
Can cost accountants conduct special audits under Section 142(2A)?
Yes, under recent amendments, cost accountants can now conduct special audits under Section 142(2A), specifically for inventory valuation audits. Previously, only chartered accountants were authorized to conduct these audits. However, due to the critical role of accurate inventory valuation in preventing tax evasion, cost accountants have been included as eligible auditors for such specialized tasks.
How can I avoid the loss of deductions in the new tax regime?
To avoid losing deductions like HRA and LTA, you must opt for the old tax regime while filing your ITR. The old tax regime allows you to claim various exemptions, including HRA and LTA. If these deductions are important for reducing your taxable income, you should carefully evaluate whether the lower tax rates offered under the new regime outweigh the benefit of these exemptions in the old regime.
What are the key differences between the old and new tax regime?
The key difference between the old and new tax regimes lies in the availability of exemptions and deductions. The old tax regime allows taxpayers to claim various exemptions (like HRA, LTA, 80C deductions) but comes with higher tax rates. The new regime offers lower tax rates but removes most exemptions and deductions. Taxpayers opting for the new regime must forgo these benefits in exchange for the simplified tax structure, making it ideal for those who do not have significant exemptions to claim.
Can I change my tax regime after filing my return?
No, once you have filed your ITR, you cannot change your tax regime for that financial year. The choice of regime—whether old or new—must be made at the time of filing your return, and once the return is submitted, the selection is final for that year. It’s important to carefully evaluate both regimes before filing to ensure you’re making the best choice for your financial situation.
What is the standard deduction available under the new tax regime?
Under the new tax regime for FY 2024-25, salaried individuals and pensioners are eligible for a standard deduction of ₹50,000. This deduction is automatically applied to reduce taxable income, but it does not compensate for the loss of other exemptions, such as HRA or LTA, which are not available under this regime. It’s a simple deduction that applies to all eligible taxpayers, regardless of the individual’s specific financial circumstances.
How can TaxBuddy help with handling audits and claims?
TaxBuddy helps simplify the process of handling Section 142(2A) audits and claiming deductions by providing expert advice, timely reminders, and support in filing accurate returns. The platform can assist with document verification, calculating tax liabilities, and ensuring you select the right tax regime for your situation. For those facing audits, TaxBuddy can offer guidance to navigate the complexities of the process, reducing the stress of compliance.
Are there any penalties for non-compliance with a Section 142(2A) audit?
Yes, non-compliance with a Section 142(2A) audit can result in penalties, including an assessment based on the available information. If the taxpayer fails to respond to the audit notice or does not cooperate with the appointed auditor, it may lead to increased liabilities. Additionally, penalties for failure to file the audit report within the specified time or failure to comply with the audit process may also apply, adding to the taxpayer’s financial burden.
What should I do if my accounts are flagged for a Section 142(2A) audit?
If your accounts are flagged for a Section 142(2A) audit, the first step is to ensure your records are well-documented and accurate. Gather all necessary documents that can support your income, deductions, and asset valuations. If any discrepancies are found, seek professional assistance to address them. Respond promptly to the audit notice, provide any additional information requested by the AO, and ensure you meet all deadlines to avoid penalties.
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