As discussions for Budget 2024 kick off today, attention is sharply focused on demands for comprehensive tax relief measures. Among the key issues brought to the notice of the finance ministry headed by Nirmala Sitharaman are a demand for the expansion of the house rent allowance (HRA) exemption to include more non-metro cities, a call for lower tax rates, revised income slabs, and higher deductions. This proposed adjustment aims to reflect the growing economic and demographic significance of many urban areas across the country.
Currently, employees who receive HRA and pay rent can claim a tax exemption under the old income tax regime. The exemption rate depends on whether the employee resides in a metro city, for tax purposes. If an employee receiving HRA does not live in a rented house, the entire allowance becomes fully taxable. Presently, only Delhi, Mumbai, Kolkata, and Chennai qualify for a 50% HRA exemption, while other cities, including Bengaluru, fall into the 40% category. Experts argue that due to the population and economic growth of many cities, it’s essential to reconsider the classification of metropolitan and non-metropolitan areas.
The Constitution (Seventy-Fourth Amendment) Act of 1992 designates the National Capital Region (NCR), Mumbai, Kolkata, Bengaluru, Pune, Hyderabad, and Chennai as metro cities.
However, cities like Ahmedabad, Surat, and Kanpur, which have seen significant development, could also be considered metros. Despite this growth, the HRA tax exemption for salaried individuals in these cities remains at 40%, as tax laws have not been updated to reflect these changes.
Residents in rapidly developing non-metro areas often face higher rents due to urban growth but receive fewer tax breaks compared to metro cities. As more people move to these areas for work, experts urge the government to rethink rent exemption rules to ease the financial burden on taxpayers.
For HRA calculation, the following cities are considered metro cities: Delhi, Mumbai, Kolkata, and Chennai. Cities in the National Capital Region (NCR) or the Mumbai Metropolitan Region (MMR) are not classified as metro cities for HRA tax calculations. Consequently, residents of cities like Noida, Gurgaon, Faridabad, Navi Mumbai, and Thane cannot claim a 50% HRA tax exemption, despite paying high rents in these areas.
Claiming HRA during tax filing: Maximizing your tax savings
The HRA exemption is calculated based on the lowest amount among the following components:
- Actual HRA received.
- 50% of salary (for those living in metro cities) or 40% of salary (for non-metro residents).
- Rent minus 10% of the salary.
Required documents
Rent Receipts: These should include acknowledgements from the landlord and the landlord’s PAN details if the rent exceeds ₹1 lakh annually.
Rental Agreement: A formal rental agreement that substantiates your claim.
These documents do not need to be uploaded but should be readily available in case of an enquiry by the authorities. False HRA claims can lead to penalties, so it’s crucial to be cautious and aware of the consequences.
