Some common expectations revolve around income slabs and tax rates, enhancement in quantum of deductions etc. However, for the salaried class there are specific areas where changes can result in significant tax benefits. One such area is the income tax exemption for house rent allowance (HRA) available to a salaried taxpayer opting for the old tax regime.
Most employers offer HRA as part of compensation structure to employees. If an employee who gets HRA, is paying rent for the accommodation in which he/she is living then tax exemption on this HRA can be claimed. However, there exists an anomaly that can lead to lower tax exemption amount. This relates to the location where the salaried taxpayer resides – is it a metro city or not, for tax purposes?
It is important to note 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. However, the amount of HRA that can be claimed as tax exempt is the lower of the following:
1. Actual HRA received;2. Actual Rent paid minus 10% of basic salary;
3. 50% of basic salary (for metro cities)/40% of basic salary (for non-metro cities).
At present, a rented house in Delhi, Mumbai, Kolkata, and Chennai qualifies for 50% exemption from HRA, while those located in other places come under the 40% bracket. It is worth mentioning that this categorization was done more than three decades ago.
With the passage of time, cities have grown demographically and economically and hence, there is a definite need to revisit the categorization of metro and non-metro city. Further, even the Constitution (seventy-fourth Amendment) Act, 1992, indicates that these 7 cities are to be considered as metro cities – National Capital Region (NCR), Mumbai, Kolkata, Bangalore, Pune, Hyderabad, and Chennai. If one was to factor the overall development (demographic, infrastructure, industrial, economic, etc.) the list would be much longer and could include cities such as Ahmedabad, Surat, Kanpur, etc.,
It is a known fact that these cities are growing rapidly and providing numerous educational/employment opportunities. For instance, Bengaluru, widely referred to as the ‘Silicon Valley of India’ for developments in the field of Information technology (IT), is serving as the largest IT hub of the country. And Pune has been named as ‘Oxford of the East’ because of the highly regarded educational institutions and universities located there. Rapid industrialization and economic development have contributed to influx of people into these cities.
However, the HRA exemption for the salaried taxpayer in these cities continues to be lower (at 40%) since the tax laws have not been suitably amended to keep up with the times. Taxpayers residing here might, therefore, end up paying a higher percentage of their income in taxes compared to metro cities. For instance, a taxpayer residing in Bengaluru may be paying higher average rent as compared to someone living in Kolkata or Chennai, which are classified as metro cities for tax purposes. Taxpayers in the above mentioned rapidly growing non-metro cities (classified so by Income-tax Act) will bear the impact of huge rents due to fast-paced urbanization and also face the disadvantage of lower tax benefit in terms of HRA tax exemption.
As the workforce continues to shift towards these ‘non-metro’ cities, the government must reconsider the rules with respect to claiming exemption for house rent, to reduce the financial burden on these taxpayers.
It is time to take a call on revision of the HRA regulations and include other deserving cities as “metro” thereby reducing the tax costs borne by salaried individuals to some extent. For the millions of residents in those cities, battling soaring rents and contributing to the national economic engine, fair HRA exemptions are not just a number; they represent a vital step towards financial security and a recognition of their sacrifices. It’s time their voices are heard, and their city’s true status acknowledged.
(The article is written by Radhika Viswanathan, Executive Director, Deloitte Haskins & Sells LLP, Vinit Turakhia, Senior Manager, Deloitte Haskins & Sells LLP and Yuvashree Rajendran, Assistant Manager, Deloitte Haskins & Sells LLP.)