As the Union Budget 2024-25 approaches, Indian taxpayers anticipate potential tax reliefs. Among the most eagerly awaited changes is the adjustment of the House Rent Allowance (HRA) exemption, for residents of non-metro cities like Bengaluru and Gurgaon. Under the old tax regime, a portion of HRA is exempt from tax, with the amount varying based on whether the individual resides in a metro or non-metro area. Taxpayers in these rapidly growing urban centres hope for increased HRA exemptions to better reflect the rising cost of living and housing in these cities.

“Reclassifying Bengaluru, Hyderabad, Gurugram, and Pune as metro cities for income tax purposes is imperative to align tax policies with the cities’ economic realities and to provide equitable tax benefits to their burgeoning workforce”, says Anshuman Magazine, chairman and CEO - India, South-East Asia, Middle East & Africa, CBRE, a real estate consultancy.

What is the provision for tax exemption on HRA?

There are currently two income tax regimes in place. The old tax regime includes all the deductions such as home loans, health insurance, government schemes, life insurance, and investments under Section 80C, and the new tax regime offers lower tax rates and a standard deduction of ₹50,000 but, with no exemptions at all.

Under the old tax regime, if an employee lives in a rented accommodation, they can claim a tax exemption under Section 10(13A) of the Income Tax Act. The individual can thus claim a tax exemption on their HRA as per Rule 2A of the Income Tax Act, 1961.

This allowance is not completely tax-exempt, it is the least of the following -

Actual HRA received from the employer
For metro cities: 50% of (Basic salary + Dearness allowance)
For non-metro cities: 40% of (Basic salary + Dearness allowance)
Actual rent paid minus 10% of (Basic salary + Dearness allowance)

“The House Rent Allowance (HRA) exemption under the Income Tax Act is calculated based on certain conditions, and there is a distinction made between metro and non-metro cities. Cities like Delhi, Chennai, Kolkata, and Mumbai are currently classified as metros, and residents in these cities can claim a higher exemption of 50% of their Basic salary + Dearness allowance. In contrast, residents of non-metro cities can claim 40%," shares Amarpal S. Chadha, tax partner and mobility leader at EY India.

The limited number of metro cities is what the employees find troublesome. The list of approved metros has not been updated since the early 1990s.

“With the changing economic landscape and the rise in the cost of living in cities like Gurgaon and Bengaluru, there is a growing demand for these cities to be reclassified as metros for HRA exemptions,” adds Chadha. Average rental prices in Bengaluru and Gurgaon now rival prices in Delhi and Mumbai.

"Key urban centres, such as Bengaluru, Hyderabad, Pune, and Gurugram, have been instrumental in driving the nation's economic expansion, fostering robust job creation, and attracting a significant influx of talent. However, a persistent incongruity exists as these cities continue to be categorised as non-metro for income tax purposes despite their pivotal role in the economy,” says Magazine. This incongruity impacts salaried IT, banking, and other professionals residing in these Tier-2 cities with inflated tax bills.

“The rationale behind this demand is that: as the cost of living in these cities increases, particularly in terms of rent, by increasing the HRA exemption limit for such cities, the government would be acknowledging the rising costs and providing much-needed relief to salaried individuals,” Chadha adds.

HRA

Budget 2024: Classify Gurgaon, Bengaluru as metros for higher HRA exemption