Budget 2024 income tax expectations: Why 50% HRA exemption should include cities like Bengaluru, Hyderabad

Budget 2024 income tax expectations: Finance Minister Nirmala Sitharaman is expected to present the first full Union Budget 2024 of the Modi 3.0 government in July. Like every year, salaried individuals are looking at FM Sitharaman to provide tax relief in the form of reduced tax rates, changed income tax slabs and even higher deductions.

One such relief that is sought is to include more non-metro cities in the 50% House Rent Allowance (HRA) exemption list. HRA is a common component of employee compensation packages provided by many employers.

Employees receiving HRA and paying rent for their accommodation can claim a tax exemption on the allowance under the old income tax regime. The exemption amount depends on whether the employee resides in a metro city or not for tax purposes. However, if an employee receiving HRA does not live in a rented house, the entire allowance becomes fully taxable.

Budget 2024: HRA Expectations

According to an ET report quoting Radhika Viswanathan, Executive Director at Deloitte Haskins & Sells LLP, the Income-tax Act, 1961, under Section 10(13A), provides tax exemption for HRA. The amount of HRA that can be claimed as tax exempt is the lowest 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).

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Currently, rented houses in Delhi, Mumbai, Kolkata, and Chennai are eligible for a 50% exemption from HRA, while those in other locations fall under the 40% category. It is important to note that this classification was established over three decades ago, according to Viswanathan.

As cities have expanded in terms of population and economic growth, it has become necessary to re-evaluate the way we define metro and non-metro cities.

Interestingly, the Constitution (seventy-fourth Amendment) Act, 1992, also recognizes the National Capital Region (NCR), Bangalore, Pune, Hyderabad as metro cities. Despite this, the HRA tax exemption for salaried individuals in these cities remains at 40% due to outdated tax laws.

Also Read | Standard deduction may rise under new tax regime

Residing outside of metro cities can result in a higher proportion of one's income being paid in taxes. For instance, an individual living in Bengaluru may have to pay a higher average rent compared to someone residing in Kolkata or Chennai, which are classified as metro cities for tax purposes.

Those living in rapidly developing non-metro cities, as defined by the Income-tax Act, may pay higher rents due to rapid urbanization. But, they receive lower tax benefits for house rent compared to metro cities. With an increasing number of people relocating to these non-metro cities for employment, it is crucial for the government to reassess the regulations for claiming rent exemptions to alleviate the financial strain on taxpayers, feel experts.

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