Major Changes Expected in House Rent Allowance Tax Caps

In a move that could significantly increase the take-home pay for millions of salaried employees, the Indian government has reportedly begun a comprehensive review of the House Rent Allowance (HRA) exemption limits.

This development follows consistent demands from tax experts and the middle class.

They are calling to align decades-old tax laws with the skyrocketing rental costs in urban centers.

The Push for Regional Reclassification

A primary focus of the review is the reclassification of metropolitan cities.

Under current laws, the Income Tax Act allows a 50% HRA deduction of basic salary only for those living in four specific cities.

These traditional metros are Delhi, Mumbai, Kolkata, and Chennai.

Residents in rapidly growing hubs like Bengaluru, Hyderabad, and Pune are currently capped at a 40% exemption.

This remains the case even though these cities often command higher rents than the traditional metros.

Internal discussions suggest the government may expand the 50% bracket to include these “New Metros,” providing immediate tax relief to the IT and corporate workforce.

House Rent Allowance Exemption: Addressing the Cost-of-Living Gap

The government is also examining the possibility of raising the overall cap on HRA exemptions.

With urban rents rising by 15-25% annually in post-pandemic India, the existing tax slabs have become increasingly disconnected from ground reality.

By revisiting these caps, the Ministry of Finance aims to boost disposable income without a direct cut in personal income tax rates.

The government sees this move as a strategic step to stimulate consumption in the domestic economy.

New Tax Regime vs. Old Tax Regime

The timing of this review is crucial as the government continues to nudge taxpayers toward the New Tax Regime.

This specific regime currently does not offer HRA exemptions.

Analysts believe that enhancing HRA benefits in the Old Tax Regime may be the government’s way of providing a final “cushion” for those with high home-rent liabilities.

Alternatively, they could be considering a modified rental rebate for the New Tax Regime to make it more attractive to urban tenants.

House Rent Allowance Exemption: Timeline and Expectations

Official notification regarding the HRA exemption changes is still awaited.

Sources indicate that these changes could be part of the upcoming supplementary budget or the next fiscal cycle.

If implemented, a mid-level professional in a city like Bengaluru could see their annual tax liability decrease by ₹25,000 to ₹50,000.

This specific amount would depend on their unique salary structure.

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