CBDT Releases Clarifications on HRA under New Regime

CBDT Releases Clarifications on HRA under New Regime

🏠 Introduction

The Income Tax Department of India, through the Central Board of Direct Taxes (CBDT), has been proactively working to provide clarifications that reduce ambiguities under the new tax regime. One of the more nuanced and often misunderstood areas in personal taxation is the treatment of House Rent Allowance (HRA) under Section 10(13A) and how it interacts with the new tax regime under Section 115BAC of the Income-tax Act, 1961.

In its latest notification and circulars issued in FY 2024–25, the CBDT has clarified certain interpretations related to HRA claims, rental proofs, employer responsibilities, and employee eligibility under the new concessional regime. This comprehensive article aims to explore these clarifications, examine their implications for both salaried employees and employers, and analyze compliance and practical ramifications for tax practitioners and businesses.


📜 Understanding the Context: The Old vs. New Tax Regime

The introduction of the new tax regime via Section 115BAC was aimed at offering lower slab rates to taxpayers who were willing to forego a majority of exemptions and deductions. This regime, although voluntary in FY 2020–21, has now become the default regime starting FY 2023–24 unless the taxpayer opts out.

Under the old regime, salaried individuals could avail of several exemptions and deductions like HRA, LTA, standard deduction, interest on housing loans, and Section 80C deductions. However, the new tax regime eliminates most of these.

Specifically, HRA exemption under Section 10(13A) is not available under the new regime — this point has been restated multiple times. Yet, ambiguities remained in scenarios involving:

These grey areas led to several queries, prompting the CBDT to release a set of clarifications.


🧾 Recent Clarifications by CBDT on HRA (FY 2024–25)

CBDT, through Circular No. 5 of 2024 dated June 28, 2024, addressed common queries surrounding HRA treatment under the new regime. Here’s a breakdown of the key clarifications made:

🔹 HRA Component Still Permitted in Salary Structure CBDT clarified that the employer may still continue to pay HRA to employees even if they opt for the new tax regime. However, no exemption under Section 10(13A) shall be admissible to the employee. The HRA amount would be fully taxable as salary income.

🔹 No Need to Submit Rent Receipts Under New Regime Since the exemption is not available, employees need not submit rent receipts to employers if they are under the new tax regime. This simplifies the administrative workload for employers.

🔹 Opting In or Out Needs Intimation Employees must intimate the employer of their intended tax regime (new or old) at the beginning of the financial year for accurate TDS deduction. If no intimation is given, the employer shall deduct tax as per the new regime (default).

🔹 Form 10-IEA Requirement Taxpayers who wish to opt-out of the new regime and choose the old one must file Form 10-IEA within the due date of filing ITR. This is critical for those looking to claim exemptions like HRA.

🔹 HRA Continues as Salary Element CBDT emphasized that the presence of HRA in the salary structure does not automatically translate to an exemption. Under the new regime, it's simply a component of salary and is fully taxable.


📚 Legal Basis and Relevant Provisions

The clarification rests on three foundational legislative elements:

  1. Section 10(13A): Allows for exemption of HRA in specific conditions under the old regime.

  2. Rule 2A of the Income Tax Rules: Provides the methodology for calculating the exempt portion of HRA.

  3. Section 115BAC: Introduced by Finance Act, 2020 — provides for a new tax regime with lower slab rates and limited exemptions.

Section 115BAC(2) states that the taxpayer opting for the new regime shall not be entitled to certain exemptions, including exemption under Section 10(13A).


💼 Employer Responsibilities Under the Clarified Guidelines

With these clarifications, employers are now expected to handle salary structuring, TDS deduction, and tax declarations more transparently.

🔖 Key Takeaways for Employers:


👨‍💼 Employee Impact and Considerations

Employees, especially in metro cities where rent is high, were heavily reliant on HRA exemption to reduce tax liability. The clarification now forces them to reassess their overall tax planning.

🔍 Scenario Illustration: Suppose an employee earning ₹15,00,000 annually pays ₹25,000 per month as rent. Under the old regime, this employee could claim a sizable exemption on HRA. However, under the new regime, this entire HRA is taxable.

Employees should now compare their effective tax liability under both regimes before making the choice.


📊 Practical Comparison: Old vs New Regime (HRA Focus)

CriteriaOld RegimeNew Regime
HRA Exemption AvailableYes (u/s 10(13A))No
Rent Proof RequiredYesNo
Effective Tax SavingsPossible, especially in high-rent zonesLimited or None
TDS Deduction ResponsibilityBased on Employee DeclarationBased on Default or Declaration


🧠 Tax Planning Strategy Post-CBDT Clarification

With the HRA exemption unavailable, employees must rethink how to minimize taxable income. Here are strategic recommendations:


📢 Communication Best Practices for Employers

To ensure compliance and reduce confusion, HR and payroll teams must:


⚖️ Legal and Audit Implications

From a statutory audit and income tax scrutiny perspective, incorrect TDS due to wrong regime application can lead to penalties. Companies must maintain proof of intimation, regime declarations, and clearly documented TDS workings.


🔮 Conclusion: What Lies Ahead?

The CBDT’s clarification on HRA under the new tax regime settles many uncertainties and empowers both employees and employers to make informed decisions. Yet, it underscores a broader shift: the tax regime now prioritizes simplicity over exemptions.

While salaried individuals lose out on traditional perks like HRA exemptions, they gain lower tax rates and reduced paperwork. However, the choice between regimes remains personal and must be re-evaluated annually.

Employers and tax consultants, like Taxaj Corporate Services LLP, must play a guiding role in navigating these changes — ensuring maximum tax efficiency, regulatory compliance, and robust documentation.


Created & Posted by Himanshu Shakya
Account Executive at TAXAJ

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