Budget 2024: Will Bengaluru, Hyderabad, Pune Get Relief Of 50% HRA Tax Exemption Rather Than 40%?

Hopes of tax reliefs have once again bloomed for common citizens in the upcoming budget 2024 which will be announced either on July 23 or 24th. Among many tax exemptions reforms, expectations of adding non-metro cities in the 50% House Rent Allowance (HRA) exemption list is likely to be on cards. That is because there is gap of 10% between metro and non-metro cities when it comes to claiming HRA.

Currently, HRA is not included in the new tax regime. HRA is a significant structure of salaried individuals pay scale, which is given by the employer as subsidy to all employees. However, the government offers benefits of tax deductions under the HRA exemption list if the employee is living in a rented house. The same is not applicable for self-owned houses and self-employed individuals.

However, self-employed can claim deduction benefits under Section 80GG of the Income Tax Act (ITA). This provision is also applicable for those who stay on rented house but do not receive an HRA.

Further, HRA is formulated depending upon the basic salary of an employee, the actual rent amount, and the city where the individual is residing. Also, HRA varies from employee to employee based on the company policies and salary structures.

Although, HRA exemption claims takes a host of factors, but the percentage of benefits vary from city to city. Cities in India are categorised into metros and non-metros.

While the HRA exemption claims should not exceed either of the three -- 1) Actual HRA paid by the employer; 2) rent paid minus 10% of salary (basic salary plus dearness allowance) or 50% HRA exemption on salary for employees in metro cities and 40% of salary for employees in non-metro cities.

Radhika Viswanathan, Executive Director, Deloitte Haskins & Sells LLP told ET Wealth Online that HRA is fully taxable for an employee not living in a rented house. Section 10(13A) of the Income-tax Act, 1961 provides tax exemption for HRA. But she shed light upon the need for bringing non-metro cities in the 50% exemption bracket.

For instance, cities like Delhi, Mumbai, Kolkata and Chennai are metro cities and enjoy the benefit of a 50% HRA exemption bracket.

Cities like Bangalore, Pune, and Hyderabad are also seen as metro cities, as per the Constitution (seventy-fourth Amendment) Act, 1992. And yet these cities have 40% HRA exemption. She does point out that the HRA exemption structure was carried out three decades ago.

She hence told the news agency that people living in rapidly growing non-metro cities, as classified by the Income-tax Act, may face higher rents due to fast urbanization. They also receive lower tax benefits for house rent compared to metro cities. As more people move to these non-metro cities for work, the government should reconsider the rules for claiming rent exemptions to ease the financial burden on taxpayers.

Apart from the restructuring of the HRA exemption limit, many other tax reforms are being expected to be announced by the PM Modi government in July in Budget 2024.

On the other hand, Anand K Rathi, co-founder of Mira Money said, "People anticipate tax reforms every time the budget happens. However, I believe this year won't bring any significant changes to Section 80C, HRA, or similar provisions. This is primarily because last year, the government had already announced a major new tax regime."

But Rathi added, "I think this time around, they will likely focus on enhancing the new tax regime. They might increase the upper limit of lower taxes from 15 lakhs to 20 lakhs. I don't expect them to increase benefits under Section 80C from 1.5 lakhs to 2 lakhs, as it would be counterintuitive given their aim to move away from such provisions. Regarding personal income tax, my view is that there won't be any substantial changes."

To claim HRA benefits, as per Kotak Life, proper documentation is essential when claiming a House Rent Allowance (HRA) exemption to ensure compliance with tax regulations and maximize your tax benefits. These are: Rent Receipts; Rental Agreement or Lease Deed; Letter from Landlord; Rent Payment Mode Proof; Form 12BB; and Salary Slip.