Should I Claim HRA or Go for Lower Tax Slabs?
Bhavika Rajput- Mar 11
- 7 min read
When it comes to tax planning, one of the biggest dilemmas salaried individuals face is whether to claim House Rent Allowance (HRA) exemption under the old tax regime or opt for the new tax regime with lower tax rates.
The decision isn’t straightforward it depends on various factors like salary structure, deductions, and overall tax liability. The old regime allows taxpayers to claim HRA exemption along with multiple other deductions, while the new regime offers simplified tax slabs but no exemptions.
So, which one is better for you? This blog breaks down HRA benefits, tax implications under both regimes, and key factors to consider, helping you make an informed decision.
Table of Contents
Understanding HRA Exemption
What is HRA Exemption?
House Rent Allowance (HRA) is a component of a salaried individual’s income that can be partially or fully tax-exempt, provided they live in a rented house. The exemption helps reduce taxable income and is especially beneficial for those incurring rental expenses.
To claim HRA exemption, the individual must live in a rented house and receive HRA from their employer. Those who own a house or do not pay rent are not eligible for this benefit.
How is HRA Exemption Calculated?
The amount of HRA exemption is determined based on the lowest of the following three values:
Actual HRA Received – The total House Rent Allowance paid by the employer annually.
Percentage of Basic Salary –
50% of basic salary if residing in a metro city (Delhi, Mumbai, Chennai, Kolkata).
40% of basic salary if residing in a non-metro city.
Excess Rent Paid – The amount by which the actual rent paid exceeds 10% of the basic salary.
This calculation ensures that HRA exemption is fairly distributed based on income and rent paid, allowing eligible individuals to reduce their taxable income accordingly.
Example 1: HRA Calculation for a Metro City (Delhi, Mumbai, Chennai, Kolkata)
Scenario:
Basic Salary = ₹50,000 per month (₹6,00,000 annually)
HRA Received = ₹20,000 per month (₹2,40,000 annually)
Rent Paid = ₹25,000 per month (₹3,00,000 annually)
Step-by-step Calculation:
Actual HRA received = ₹2,40,000
50% of Basic Salary (for a metro city) = ₹3,00,000 (50% of ₹6,00,000)
Excess Rent Paid over 10% of Basic Salary:
Rent Paid = ₹3,00,000
10% of Basic Salary = ₹60,000 (10% of ₹6,00,000)
Excess Rent Paid = ₹3,00,000 - ₹60,000 = ₹2,40,000
The lowest of the three amounts is ₹2,40,000, so the HRA exemption is ₹2,40,000, and the remaining ₹0 is taxable.
Example 2: HRA Calculation for a Non-Metro City
Scenario:
Basic Salary = ₹40,000 per month (₹4,80,000 annually)
HRA Received = ₹15,000 per month (₹1,80,000 annually)
Rent Paid = ₹18,000 per month (₹2,16,000 annually)
Step-by-step Calculation:
Actual HRA received = ₹1,80,000
40% of Basic Salary (for a non-metro city) = ₹1,92,000 (40% of ₹4,80,000)
Excess Rent Paid over 10% of Basic Salary:
Rent Paid = ₹2,16,000
10% of Basic Salary = ₹48,000 (10% of ₹4,80,000)
Excess Rent Paid = ₹2,16,000 - ₹48,000 = ₹1,68,000
The lowest of the three amounts is ₹1,68,000, so the HRA exemption is ₹1,68,000, and the remaining ₹12,000 (₹1,80,000 - ₹1,68,000) is taxable.
HRA in the Old v/s New Tax Regime
When deciding between the old tax regime and the new tax regime, it’s essential to understand how HRA exemption and other deductions impact taxable income. The two regimes offer different benefits, and the right choice depends on an individual’s salary structure and deductions.
Old Tax Regime: HRA Benefits and Other Deductions
Under the old tax regime, taxpayers can claim HRA exemption, along with several other deductions, to reduce their taxable income.
HRA Exemption is Available: Salaried individuals living in rented accommodations can partially or fully exempt HRA from taxation, as per the standard HRA calculation.
Additional Deductions Can Be Claimed: Apart from HRA, taxpayers can also claim deductions such as:
Section 80C – Up to ₹1.5 lakh for investments in PPF, EPF, life insurance premiums, ELSS, and more.
Section 80D – Health insurance premium deductions for self and family.
Section 80CCD(1B) – Additional deduction of ₹50,000 for contributions to the National Pension System (NPS).
Higher Tax Slabs, But More Savings Through Deductions – Although the tax slabs in the old regime are higher, the ability to claim multiple deductions can significantly lower overall tax liability. Individuals with substantial deductions often find the old regime more beneficial.
New Tax Regime: No HRA Exemption, But Lower Tax Rates
The new tax regime, introduced in FY 2020-21, provides lower tax rates but eliminates most deductions, including HRA exemption.
HRA is Fully Taxable – Under this regime, HRA is added to the taxable salary, meaning employees living in rented houses cannot claim an exemption on their rent payments.
Lower Tax Rates – The key benefit of the new regime is that tax rates are lower across income brackets, making it appealing for individuals who do not have significant deductions.
Higher Standard Deduction – The standard deduction has been increased to ₹75,000 for FY 2024-2025, (compared to ₹50,000 in the old regime), providing some relief despite the removal of other exemptions.
Key Takeaway:
If you have substantial deductions, including HRA, the old tax regime might be more tax-efficient.
If you have fewer deductions and prefer simpler tax filing with lower tax rates, the new tax regime could be a better choice.
When to Choose Each Regime
Choosing between the old and new tax regimes depends on factors such as salary structure, deductions, and overall tax liability. Below is a guide to help determine which option may be more beneficial.
Choose the Old Regime If:
You have substantial deductions, including:
HRA exemption for rented accommodation
Section 80C deductions (PPF, EPF, life insurance, ELSS, etc.)
Section 80D deductions for health insurance premiums
Section 80CCD(1B) additional ₹50,000 deduction for NPS contributions
Your total deductions significantly reduce taxable income, making the old regime more beneficial despite its higher tax slabs.
For example, if your deductions exceed ₹2.5-3 lakh annually, the old regime might offer more tax savings compared to the new regime.
Choose the New Regime If:
You do not have many deductions and prefer a simpler tax filing process without relying on investment-based exemptions.
Your income exceeds ₹20 lakh, where the lower tax slabs in the new regime might result in better tax savings.
For example, if you do not claim HRA, 80C, or 80D deductions and earn a higher salary, the lower tax rates of the new regime could be more advantageous.
Conclusion
Deciding between claiming HRA in the old tax regime or opting for the lower tax slabs of the new tax regime depends on individual income, deductions, and financial goals.
The old tax regime is generally more beneficial for salaried individuals who live in rented houses and have multiple deductions, as it allows them to lower their taxable income.
The new tax regime is more suitable for those with fewer deductions who want a simpler filing process and potentially lower tax liability.
Before making a decision, it is essential to evaluate salary structure, eligible deductions, and overall tax impact to determine which regime provides the greatest tax benefits.
FAQs
1. Can I switch between the old and new tax regimes every year?
Yes, salaried individuals can switch between the old and new tax regimes every financial year while filing their Income Tax Return (ITR). However, taxpayers with business or professional income can only switch once in a lifetime, after which they must continue with the new regime.
2. How do I calculate HRA exemption if my salary structure changes?
HRA exemption is calculated based on basic salary, actual HRA received, rent paid, and city of residence. If your salary changes mid-year, you must calculate the exemption separately for each salary period and total it for the financial year. The three conditions for calculating HRA remain the same:
Actual HRA received
50% of basic salary (metro city) or 40% (non-metro city)
Rent paid minus 10% of basic salary
3. Is there any way to claim HRA in the new tax regime?
No, under the new tax regime, HRA is fully taxable, and no exemption is allowed. The only way to benefit from HRA is by choosing the old tax regime.
4. If I live in my own house, can I still claim HRA?
No, HRA exemption is only for individuals who pay rent for accommodation. However, if you are paying rent to your parents and they declare it as rental income, you may still be eligible for HRA exemption under the old regime.
5. Can I claim both HRA and home loan benefits under the old tax regime?
Yes, you can claim both if:
You own a house but live in a different rented house due to work (HRA exemption).
You are repaying a home loan and claiming Section 80C (principal repayment) and Section 24(b) (interest deduction up to ₹2 lakh on a self-occupied house).
6. If my employer does not provide HRA, can I still claim rent deduction?
Yes, but under Section 80GG, which allows a deduction for rent paid if you are self-employed or salaried without HRA benefits. The deduction is limited to the least of the following:
₹5,000 per month
25% of total income
Rent paid minus 10% of total income
7. How does HRA work for those working remotely from a different city?
If you work remotely from a rented house in a different city, you can still claim HRA exemption, provided you are actually paying rent and can provide rent receipts. Your employer may request proof of residence for verification.
8. Does the new tax regime offer any tax benefits other than lower slabs?
Yes, apart from lower tax rates, the new tax regime offers:
Higher standard deduction of ₹75,000 for salaried individuals.
No need to track investments and deductions, simplifying tax filing.
However, it does not allow deductions under Sections 80C, 80D, HRA, or home loan benefits.
9. What happens if I forget to submit HRA proof to my employer?
If you fail to submit rent receipts or other HRA proof, your employer will deduct tax without considering the HRA exemption. However, you can still claim the exemption while filing your ITR, provided you have valid rent payment proof.
10. Is the old tax regime always better if I have deductions?
Not necessarily. While deductions lower taxable income, it’s essential to compare both regimes based on your actual tax liability. If your deductions exceed ₹2.5-3 lakh, the old regime may be beneficial. Otherwise, the new regime’s lower tax rates could provide more savings.
11. Can I claim HRA if I share rent with a roommate?
Yes, you can claim HRA while sharing rent, but you must ensure:
Your name is mentioned on the rent agreement.
You receive rent receipts for your share of the rent.
Payment is made through traceable transactions (bank transfers, UPI, etc.).
12. If my employer does not provide HRA, should I choose the new tax regime?
Not necessarily. Even without HRA, the old regime offers other deductions such as Section 80C (investments), 80D (health insurance), and home loan interest deductions. It is best to compare total tax liability under both regimes before making a decision.
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