Smart Tax Planning for Salaried Employees: HRA & Deductions

Tax planning is an essential aspect of personal finance, especially for salaried individuals. By understanding the components of your salary and the deductions available, you can significantly reduce your tax liability. This guide focuses on House Rent Allowance (HRA) and various deductions under the Income Tax Act that can aid in effective tax planning.

Managing taxes effectively is crucial for salaried employees aiming to maximize their take-home pay. Two significant components in this endeavor are House Rent Allowance (HRA) and various deductions available under the Income Tax Act. This guide delves into these aspects, offering insights and strategies to optimize your tax liabilities.

Understanding House Rent Allowance (HRA)

What is HRA?

House Rent Allowance (HRA) is a component of a salary package provided by employers to employees to meet rental housing expenses. It serves as a means to save taxes for employees residing in rented accommodations.

Eligibility Criteria for HRA Exemption

To claim HRA exemption:

You must be a salaried individual receiving HRA as part of your salary.
You should be residing in rented accommodation and paying rent.
If you live in your own house, HRA cannot be claimed.
If you pay rent to your parents, you can claim HRA, but they must declare this income in their tax returns.

Calculating HRA Exemption

The amount of HRA exemption is determined by the lowest of the following:

Actual HRA received from the employer.
50% of salary (for those living in metro cities) or 40% of salary (for non-metro cities).
Actual rent paid minus 10% of salary.

Here, salary includes basic salary, dearness allowance (if applicable), and commission (if any received as a fixed percentage of turnover).

Examples of HRA Calculation

Example 1:

Basic Salary: ₹50,000 per month
HRA Received: ₹20,000 per month
Rent Paid: ₹18,000 per month
Living in a metro city

Calculation:

Actual HRA received: ₹20,000
50% of salary: ₹25,000 (50% of ₹50,000)
Rent Paid – 10% of Salary: ₹18,000 – ₹5,000 = ₹13,000

HRA exemption = Lowest of the above values = ₹13,000 per month.

Income Tax Slabs for FY 2025-26 (AY 2026-27)

Old Tax Regime

Income Range (₹)	Tax Rate
0 – 2,50,000	Nil
2,50,001 – 5,00,000	5%
5,00,001 – 10,00,000	20%
Above 10,00,000	30%

New Tax Regime

Income Range (₹)	Tax Rate
0 – 3,00,000	Nil
3,00,001 – 7,00,000	5%
7,00,001 – 10,00,000	10%
10,00,001 – 12,00,000	15%
12,00,001 – 15,00,000	20%
Above 15,00,000	30%

Note:

A tax rebate up to ₹25,000 is applicable if the total income does not exceed ₹7,00,000, meaning no tax liability for income up to ₹7,00,000.
The standard deduction for salaried employees under the new regime is ₹75,000.
The deduction on family pension received has increased from ₹15,000 to ₹25,000.
The deduction limit on the employer's contribution to NPS is 14% for FY 2024-25.
The highest surcharge rate under the new regime is 25%, compared to 37% in the old regime.
The new regime is the default tax regime; individuals opting for the old regime must file Form 10-IEA. Tax Planning for Salaried Employees: HRA and Deductions

Choosing Between Old and New Tax Regimes

The new tax regime offers lower tax rates but removes most exemptions and deductions. If you claim high deductions, the old regime may be more beneficial. A tax computation should be done to determine the optimal choice.

Standard Deduction

For FY 2024-25, the standard deduction for salaried employees under the new tax regime has been increased from ₹50,000 to ₹75,000. This enhancement is aimed at providing additional tax relief, making the new regime more attractive for middle-income earners. However, under the old tax regime, the standard deduction remains ₹50,000. This increase in deduction allows salaried employees under the new tax regime to save up to ₹7,500 in taxes compared to the previous year.

Other Key Deductions for Salaried Employees

Section 80C – Investments and Expenses

Provident Fund (EPF/PPF)
Life Insurance Premiums
Tax-saving Fixed Deposits
Equity-linked Saving Schemes (ELSS)
Principal repayment of Home Loan

Section 80D – Medical Insurance

Self & Family: Up to ₹25,000
Parents (below 60 years): ₹25,000
Senior Citizen Parents: ₹50,000

Section 80E – Education Loan Interest

Interest on education loans is fully deductible for up to 8 years.

Section 80TTA – Savings Account Interest

Savings account interest up to ₹10,000 is tax-free for individuals and HUFs.

Conclusion

Effective tax planning involves utilizing HRA, standard deductions, and various tax-saving provisions. Salaried employees should assess both tax regimes before filing their returns to minimize tax liability.

FAQs

Can I claim HRA if I live with my parents?

Yes, but you must enter into a rental agreement with them and pay rent regularly. Additionally, your parents must declare this rental income in their tax returns. Payments should ideally be made via bank transactions to maintain proof.

Can I claim both HRA and a home loan deduction?

Yes, you can claim both if your home loan is for a different property than the one you reside in. If you live in a rented house but have a home loan for another property, you can claim HRA benefits along with deductions on home loan interest under Section 24(b) and principal repayment under Section 80C.

What happens if I forget to claim HRA?

If you miss claiming HRA through your employer, you can still claim it while filing your Income Tax Return (ITR). You need to calculate the eligible exemption and mention it under ‘exempted income’ while filing your return.

Is it mandatory to submit rent receipts?

Yes, if your annual rent exceeds ₹1 lakh, you must provide rent receipts to your employer to claim HRA exemption. Additionally, if the annual rent exceeds ₹50,000, you must provide the landlord’s PAN details.

Can I claim HRA if my salary does not include it?

No, HRA is a component of the salary structure. If your employer does not provide HRA, you cannot claim this exemption. However, self-employed individuals or those not receiving HRA can claim deductions under Section 80GG.

Is HRA applicable to self-employed individuals?

No, HRA is exclusively for salaried employees. However, self-employed individuals can claim deductions for rent paid under Section 80GG, subject to specific conditions.

What if my rent is paid in cash?

You can still claim HRA if rent is paid in cash, but you must obtain a valid rent receipt from your landlord. If the annual rent exceeds ₹1 lakh, the landlord’s PAN is mandatory for verification.

Can I claim deductions in both old and new tax regimes?

No, under the new tax regime, most deductions such as 80C, 80D, and HRA exemptions are not available. Only a few specific deductions, like the standard deduction, are allowed.

Is the standard deduction applicable in the new tax regime?

Yes, for FY 2024-25, the standard deduction for salaried employees has been increased to ₹75,000 in the new tax regime. It remains ₹50,000 in the old regime.

How is the tax regime chosen?

The choice of tax regime is made while filing the income tax return. By default, the new tax regime applies, but individuals preferring the old regime must declare their choice by filing Form 10-IEA before the due date of return filing.

Can I switch between tax regimes?

Salaried employees have the flexibility to switch between tax regimes every financial year while filing their returns. However, business owners and professionals who opt for the new tax regime cannot switch back to the old regime once chosen.

Can I claim HRA without paying rent?

No, actual rent payment is necessary to claim HRA benefits. You must provide valid proof of rent payment, such as receipts or bank transfers, for verification.