1. What is HRA (House Rent Allowance)?
House Rent Allowance (HRA) is a part of an employee’s salary meant to help cover the cost of renting a house. It is provided by employers to employees who live in rented accommodations. Under the Income Tax Act, HRA is partially exempt from tax, making it a significant allowance for salaried individuals.
HRA Calculation for Tax Exemption:
The amount of HRA that is exempt from tax is determined by the following formula:
HRA Exemption = Lower of:
- Actual HRA received by the employee
- Rent paid minus 10% of salary (basic + DA)
- 50% of salary (for metro cities) or 40% (for non-metro cities)
2. What is LTA (Leave Travel Allowance)?
Leave Travel Allowance (LTA) is an allowance given by employers to employees for traveling within India during leave. It is exempt from tax under section 10(5) of the Income Tax Act, provided it meets certain conditions. LTA is a great way to save on taxes while going on vacations, but it is available only for travel expenses within India.
LTA Exemption:
LTA is exempt from tax for the travel expenses of the employee and their family. However, it is limited to two journeys in a block of four years and can only be claimed for travel expenses within India.
HRA & LTA: Tax Impact Under the Old vs New Tax Regime
Old Tax Regime: How HRA & LTA Impact Your Taxes
Under the old tax regime, employees can claim tax exemptions for both HRA and LTA, which can significantly reduce the taxable income and, consequently, the tax liability.
- HRA in the Old Regime:
- Exemption Available: HRA is exempt from tax to the extent of the lowest value calculated using the above formula.
- Claiming HRA Exemption: Employees must submit proof of rent payments and may need to provide rental agreements or receipts to avail of the exemption.
- LTA in the Old Regime:
- Exemption Available: Employees can claim tax exemption on the actual travel expenses incurred within India, subject to the block of four years and travel limits.
- Claiming LTA Exemption: Employees must submit travel bills, tickets, and other relevant documents to claim LTA exemption. Only domestic travel expenses qualify for tax exemption.
In the old tax regime, these allowances reduce the overall taxable income and lead to lower tax outflows.
New Tax Regime: HRA & LTA – What’s Changed?
The new tax regime introduced in FY 2020-21 offers lower tax rates but does not allow for tax exemptions on many allowances, including HRA and LTA. Here’s how the new regime affects them:
- HRA in the New Regime:
- Exemption Not Available: Under the new tax regime, HRA is fully taxable as part of your salary since tax exemptions on allowances like HRA are not available.
- Impact: Employees cannot avail of any tax-saving benefits from HRA if they opt for the new tax regime.
- LTA in the New Regime:
- Exemption Not Available: LTA is also not exempt under the new tax regime, which means that the travel allowance given to employees is fully taxable if they choose this regime.
- Impact: Employees who switch to the new tax regime will lose the ability to claim tax exemption on LTA.
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Comparison of HRA & LTA: Old vs New Tax Regime
| Feature | Old Tax Regime | New Tax Regime |
| HRA Exemption | Available with certain conditions | Not available (fully taxable) |
| LTA Exemption | Only for domestic travel within a block of 4 years | Not available (fully taxable) |
| Taxable Income | Reduced If Exemption Received | No reduction for these allowances |
| Best suitable For | Individuals with significant rent or travel expenses | Individuals preferring lower tax rates without exemptions |
Which Regime Should You Choose?
Old Regime: Best for Claiming HRA & LTA
The old tax regime is still the best option for individuals who have significant expenses related to house rent or leave travel, as the exemptions on HRA and LTA can result in substantial tax savings.
If you pay high rent or travel frequently within India, the old regime could be more beneficial as it allows deductions and exemptions that can lower your taxable income.
New Regime: Best for Simplicity and Lower Tax Rates
The new tax regime is more beneficial for individuals who prefer simplified tax filing and who do not have major expenses for HRA or LTA. It offers lower tax rates across income brackets but sacrifices allowances and exemptions.
If you do not claim many exemptions and prefer a straightforward tax structure, the new tax regime may suit your needs, especially with its lower tax rates.
Conclusion: Choose the Right Tax Regime Based on Your Needs
In summary, the old tax regime is ideal for individuals who can take advantage of HRA and LTA exemptions, which help reduce taxable income. On the other hand, the new tax regime is designed for those who prefer simpler tax filing and lower tax rates without the need for exemptions.
Before making a choice, it’s essential to calculate whether the exemptions on HRA, LTA, and other deductions (like 80C) outweigh the benefits of the reduced tax rates in the new regime. For individuals with significant rental expenses or travel needs, the old regime remains the better option, while others may find the new regime more beneficial for simplicity.
Here are some additional Frequently Asked Questions (FAQs) about HRA (House Rent Allowance) and LTA (Leave Travel Allowance) under both the Old and New Tax Regimes:
FAQs on HRA & LTA in the Old and New Tax Regimes
1. What is the difference between HRA and LTA?
- HRA (House Rent Allowance) is an allowance provided by employers to employees to meet their rental expenses. It is partially exempt from tax under certain conditions.
- LTA (Leave Travel Allowance) is an allowance given to employees to cover the travel expenses of themselves and their family when they go on leave. LTA is exempt from tax only for domestic travel expenses.
2. Can I claim both HRA and LTA in the same year?
- Yes, you can claim both HRA and LTA in the same year, as long as you meet the conditions for both exemptions under the tax laws. However, if you opt for the new tax regime, you will lose the ability to claim exemptions on both allowances.
3. Do I need to submit rent receipts to claim HRA exemption?
- Yes, to claim HRA exemption, you are required to submit proof of rent payments, such as rent receipts, along with a rental agreement if requested by your employer or the Income Tax Department. In some cases, the employer may also request a declaration from you regarding the rent you pay.
4. Is there a limit on the amount of LTA that can be claimed?
- LTA can be claimed for the actual travel expenses within India for yourself and your family. The exemption is available for two journeys in a block of four years. You can only claim the expenses for the mode of travel (air, rail, bus, etc.), not for stay or food.
5. Is LTA available for travel outside India?
- No, LTA is only available for domestic travel within India. Any travel expenses incurred for foreign trips do not qualify for LTA exemption under the Income Tax Act.
6. Can I claim LTA for travel to my hometown?
- Yes, you can claim LTA for travel to your hometown or any other destination within India. The exemption is available as long as you meet the travel conditions and submit the relevant proof, such as travel tickets and bills.
7. If I choose the new tax regime, can I still claim HRA and LTA exemptions?
- No, under the new tax regime, exemptions for both HRA and LTA are not available. These allowances will be fully taxable as part of your income, and you cannot claim any exemptions on them.
8. How can I calculate HRA exemption?
- HRA exemption is calculated as the minimum of:
- Actual HRA received
- Rent paid minus 10% of basic salary (including dearness allowance)
- 50% of salary (for metro cities) or 40% (for non-metro cities)
Ensure you provide the necessary documents such as rent receipts to claim the exemption correctly.
9. Is HRA applicable if I live in my own house?
- No, HRA is not applicable if you live in your own house or if you do not pay rent. The allowance is provided only when you are paying rent to a landlord.
10. Can HRA be claimed if I stay with my parents?
- Yes, you can claim HRA even if you stay with your parents, provided you pay rent to your parents. You will need to provide proof of rent payment (rent receipts or bank transfer details) to claim the exemption.
11. Is LTA taxable if I do not travel within the block period?
- If you do not claim LTA during the four-year block period, you cannot carry it forward to the next block. The unused LTA from the block period is not eligible for tax exemption and will be treated as taxable income.
12. Can I switch between the old and new tax regime every year?
- Yes, salaried individuals can switch between the old and new tax regimes each year. However, it’s essential to evaluate whether you will benefit from exemptions like HRA, LTA, and others in the old regime, or if you prefer the simplified tax structure and lower rates under the new regime.
13. Can I claim LTA if I take a short leave and travel within India?
- Yes, as long as you meet the criteria for domestic travel and submit valid travel documents such as tickets and bills, you can claim LTA for any domestic travel, including travel during a short leave.
14. Does the amount of HRA exemption affect my CTC?
- HRA exemption does not directly impact your CTC (Cost to Company). It reduces your taxable income and, consequently, your tax liability. Your employer may provide a breakdown of the total CTC, including HRA as part of your salary package.
15. Can I claim LTA and also get tax exemptions under Section 80C, 80D, etc.?
- Yes, LTA exemptions are separate from exemptions available under sections like 80C (for PPF, life insurance, etc.) and 80D (for health insurance). You can claim both LTA exemption and deductions under these sections, provided you meet the conditions for both.
