HRA and old tax regimeImage Credit source: AI
Whenever there is talk of saving tax, most people can only think of Section 80C or health insurance. But for salaried people, House Rent Allowance (HRA) is such a benefit, due to which income up to lakhs of rupees can be exempted from tax. The special thing is that there is no direct upper limit on HRA, whereas the limit of other exemptions is fixed.
This is the reason why even today a large number of taxpayers choose the old tax regime, because there is the benefit of HRA. The new tax system may seem easy, but these big exemptions are not available in it.
Why is HRA not completely unlimited?
Even though there is no fixed cap on HRA, the formula for availing tax exemption is fixed. The discount amount is considered to be the lowest among the three. HRA depends on how much HRA you got from the company, how much rent you are paying compared to your salary and whether you live in a metro city or a non-metro. However, here salary does not only mean basic, but basic salary, dearness allowance and commission are also included in it. That means the real strength of HRA depends on your salary structure and rent.
Old vs New Tax System
According to tax expert Neeraj Aggarwal (Partner, Nangia & Company LLP), HRA is one of the strongest exemptions in the old tax regime. When HRA is used properly, the old tax system becomes more beneficial than the new system in many cases. For example, if a person with an annual salary of Rs 15 lakh does not claim HRA, then the new tax system may be cheaper. But as soon as HRA is added, the picture changes and the tax liability in the old tax regime reduces.
Higher salary earners get more benefits from HRA
Suppose your annual salary is Rs 30 lakh and you live in a metro city like Mumbai. If your basic and DA are good and you also pay more rent, then income worth lakhs of rupees from HRA can be tax free. In such cases, the old tax system has a clear edge over the new tax system. This is the reason why corporate sector professionals working in big cities consider HRA as the biggest tax saver.
What are the expectations from Budget 2026?
Now the big question is what should be changed regarding HRA in Budget 2026? Tax experts believe that the current system has lagged behind the ground reality. Today, fares in cities like Bengaluru, Hyderabad, Pune, Gurugram and Noida are as expensive as Mumbai-Delhi, but they are still considered non-metro as per tax rules. Neeraj Aggarwal says that these fast growing cities should be included in the metro category, so that the employees living there can also get HRA relaxation of up to 50%.
Suggestion to link HRA to index
In the ET report, Chartered Accountant Dr. Suresh Surana believes that there is a need to make the tax system more rational in the times to come. Especially when the new Income Tax Act 2025 is going to be implemented from April 2026. According to him, the HRA limit should be linked to a government housing index, such as CPI-Housing or NHB RESIDEX. With this, HRA will automatically adjust according to the inflation of rent and there will be no need to change the rules again and again.
How safe is it to claim HRA by paying rent to the family?
Many people claim HRA by paying rent to their parents or grandparents. The law allows this, but the condition is that the entire transaction should be genuine and fair. Dr. Suresh Surana says that the Income Tax Department investigates more in such cases. Therefore, there should be a written rent agreement, the rent should be paid through the bank and the landlord is required to show that rent in his income tax return.
However, HRA claim can often come under doubt if rent is paid to the husband or wife, hence special caution is necessary in this. HRA still strengthens the old tax regime. But considering the changing times and rising rents, there is a need to update the HRA rules in Budget 2026. If this happens, taxpayers with crores of salaries can get direct benefits.
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