Under the Income Tax rules, HRA is a deduction for which there is no limit. Actual HRA is the lower of 50% of basic salary (40% in non-metros) and actual rent paid minus 10% of basic salary. The old regime may be beneficial for taxpayers who claim a very high HRA
Old / New Tax Regime: In the Union Budget, announcements were made to make the new income tax regime attractive. Standard deduction was increased. Tax slabs were changed. Deduction on employer’s contribution to NPS was increased. Despite this, taxpayers who take full advantage of tax deductions and exemptions find the old tax regime attractive. But, tax calculations show that even though the old regime seems attractive, taxpayers in the mid to high tax bracket can have more tax savings of Rs 13,000-16,250 in the new regime.
Deduction on HRA is available in the old regime
It is estimated that taxpayers take full advantage of every deduction and exemption. This includes Rs 1.5 lakh under section 80C, Rs 75,000 under 80D (self and parent’s health policy), Rs 50,000 contribution to NPS under 80CCD (1B) and Rs 2 lakh deduction on home loan interest under section 24 (B). A major tax benefit in the old regime for high-income taxpayers is HRA.
No limit for HRA deduction
There is no limit for HRA. Actual HRA is 50% of basic salary (40% in non-metro) and actual rent paid minus 10% of basic salary, whichever is less, is applicable. If taxpayers claim more deduction, then the old tax regime is good for them. If this is not the case, then the new regime is good for taxpayers. In this, their tax will be less.
Effect of HRA on tax liability
Suppose your gross salary is Rs 60 lakh. If you claim a deduction of Rs 4.33 lakh (including standard deduction of Rs 50,000), then your tax will be less in the old regime. If you claim a deduction of Rs 4.5 lakh (including standard deduction of Rs 50,000), then your tax will be less by about Rs 5,720 in the old regime.
HRA is helpful for high net worth taxpayers
Suppose you claim HRA of Rs 12 lakh in addition to claiming all types of deductions including 80C, 80D, then your tax savings will increase to Rs 4,77,620. Mumbai-based chartered accountant Chirag Chauhan said that for most salaried taxpayers, HRA can be the factor on the basis of which one can choose between the new and old regime.
The new tax regime is beneficial for a high net worth individual whose income is more than Rs 5 crore. This is because the surcharge in the new regime is 25 per cent, whereas in the old regime it was 37 per cent. However, even in such cases, if the taxpayer lives in a big city where he has to pay a lot of rent, then HRA can make a big difference.
For example, if a taxpayer’s salary is Rs 6 crore and he pays Rs 5 lakh rent every month, then his tax will be Rs 2.92 lakh less in the old regime. But, if the taxpayer does not live on rent and claims HRA, then the new regime will be beneficial for him, because his tax will be reduced to about Rs 22 lakh.
