HRA Exemption in Old vs New Tax Regime: When Metro City Rules Still Matter
HRA exemption under s.10(13A) is only available in the OLD tax regime — under the new regime s.115BAC it is fully taxable. For a ₹12 lakh Mumbai employee the new regime's ₹12 lakh rebate often wins anyway; at ₹18 lakh with HRA plus home loan, old regime can still win by ₹34,840. Here is the break-even.
Harun Raaj
Chartered Accountant · Harun Raaj & Associates
HRA exemption under s.10(13A) ITA 1961 is available ONLY under the old tax regime — under the new regime (s.115BAC ITA 1961) it is surrendered, and every rupee of HRA you receive is taxed as salary. For a ₹12,00,000 gross Mumbai employee, the new regime's ₹12 lakh rebate (s.87A, up to ₹60,000) usually wins anyway despite the lost HRA. But above the rebate zone, a metro-city employee with HRA plus home-loan interest can still beat the new regime — our ₹18 lakh worked example shows the old regime winning by ₹34,840. This article is the break-even map.
The regime rule, stated once
In the new regime, s.115BAC(1A) removes most Chapter VI-A deductions and specifically disallows the exemptions under s.10(5), (13A), (14), (17) and (32) — HRA under s.10(13A) is on that disallow list. (Other s.10 items — gratuity s.10(10), leave encashment s.10(10AA), PF s.10(11)/(12), NPS s.10(13) — remain available.) So the "metro city" question is meaningful only if you file under the old regime. If you are on the new regime, the metro list is irrelevant to your tax.
The ₹12 lakh case: Meera, Mumbai
Meera earns ₹12,00,000 gross in Mumbai: basic ₹5,00,000, HRA ₹2,00,000, special allowance ₹5,00,000. Rent ₹28,000/month = ₹3,36,000 a year.
HRA exemption (old regime, metro 50%): least of (₹2,00,000 HRA; ₹3,36,000 − ₹50,000 = ₹2,86,000; 50% × ₹5,00,000 = ₹2,50,000) = ₹2,00,000.
New regime wins — by ₹59,800. Meera's HRA exemption is worth ₹2,00,000 on paper, but the new regime's ₹12 lakh rebate zeroes the tax anyway. This is the honest answer for most ₹12 lakh employees: the HRA deduction, however large, cannot beat a ₹0 tax bill. If her deductions were small, the gap would be even wider.
Changed FY 2025-26: Budget 2025 widened the new-regime s.87A rebate to ₹60,000 for income up to ₹12 lakh and raised the standard deduction to ₹75,000 in the new regime. The old-regime standard deduction stays ₹50,000. This is exactly why the ₹12-lakh employee usually lands in the new regime even with a healthy HRA claim. on any ITA 2025 transitional nuance for the new code from tax year 2026-27.
The ₹18 lakh case: Rohan, Mumbai — where old regime still wins
Rohan earns ₹18,00,000 gross in Mumbai: basic ₹9,00,000, HRA ₹3,60,000, special ₹5,40,000. Rent ₹35,000/month = ₹4,20,000. He also pays ₹2,00,000 a year in home-loan interest.
HRA exemption (old regime, metro 50%): least of (₹3,60,000 HRA; ₹4,20,000 − ₹90,000 = ₹3,30,000; 50% × ₹9,00,000 = ₹4,50,000) = ₹3,30,000.
Old regime wins by ₹34,840 — because Rohan is above the rebate zone (₹17.25 lakh taxable) and carries a full deduction stack: ₹3,30,000 of HRA plus ₹2,00,000 of home-loan interest plus ₹2,25,000 of 80C/NPS/80D. That is the combination — HRA plus a home loan — that makes the old regime pay.
The break-even logic
The trigger for switching back to the old regime is rarely HRA alone — it is HRA plus home-loan interest plus a full 80C/NPS/80D stack, on income above the rebate zone. Run both regimes in the Old vs New Regime Calculator and the HRA exemption calculator before deciding.
FAQ
1. Is HRA exemption available in the new tax regime?
No. Under s.115BAC ITA 1961, HRA received is fully taxable. The exemption under s.10(13A) is preserved only in the old regime.
2. Should a ₹12 lakh employee in Mumbai switch to the old regime for HRA?
Usually no. The new regime's ₹12 lakh rebate (up to ₹60,000) zeroes the tax at that income. Even with a ₹2 lakh HRA exemption, the old regime rarely beats ₹0.
3. When does the old regime win despite losing HRA?
When taxable income is above the rebate zone and you carry a full stack — HRA plus home-loan interest plus 80C/NPS/80D. Our ₹18 lakh example shows old regime winning by ₹34,840.
4. Does the 50% metro vs 40% non-metro rule matter in the new regime?
No. Metro status only affects the HRA exemption under Rule 2A in the old regime. In the new regime HRA is fully taxable and the city label is irrelevant.
5. What is the standard deduction in each regime for FY 2025-26?
₹50,000 in the old regime and ₹75,000 in the new regime, under s.16(ia). The new-regime figure was raised by Budget 2025.
6. Can I switch regimes every year?
For salary income, yes — every year you can choose the regime that is cheaper, as long as you have no business income (where switching is restricted by s.115BAC(6)). Recompute each year as slabs and your deductions change.
7. Where can I compute the exact break-even?
Use the Old vs New Regime Calculator with your HRA exemption from the HRA exemption calculator — both FY-aware for FY 2025-26.
Sources
- s.10(13A) ITA 1961 read with Rule 2A IT Rules 1962 (HRA exemption; ITA 2025: Schedule III(11)).
- s.115BAC ITA 1961 (new regime; HRA exemption not available; ITA 2025: s.202).
- s.87A ITA 1961 (rebate: ₹60,000 up to ₹12 lakh new regime; ₹12,500 up to ₹5 lakh old regime). ITA 2025 equivalent.
- s.16(ia) ITA 1961 (standard deduction ₹75,000/₹50,000 as per regime). ITA 2025 equivalent.
- s.24(b) ITA 1961 (home-loan interest up to ₹2,00,000 self-occupied). ITA 2025 equivalent.
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