HRA and common deductions: how salaried people lower tax
The main ways to reduce taxable income, mostly on the old regime
If you earn a salary, pay rent, and put money into savings, the tax system lets you lower the income you are taxed on, if you use the right deductions. A deduction simply shrinks the slice of your income that tax is charged on. The most talked-about one for renters is the House Rent Allowance, and there are several others worth knowing.
The house rent allowance, in plain words. Many salary packages include an amount labelled House Rent Allowance (HRA). If you actually live in rented accommodation and pay rent, part of that allowance can be left out of your taxable income. The exempt part is set by a formula based on your salary, how much rent you pay, and your city, so it differs from person to person. The key conditions: you must really pay rent, and it only works on the old tax regime.
The catch behind every deduction: your regime. This is the part that trips people up. Most deductions, including HRA, the investment limit and the health insurance premium, work only on the old tax regime. The new regime, now the default, drops almost all of them in exchange for lower tax rates. So before counting any deduction, decide your regime. Our lesson on the old versus new regime helps you choose.
Did you know? The new regime removes the house rent allowance exemption entirely, even if you pay rent. For someone paying high rent in a metro, that lost exemption can be large, which is exactly why the regime choice deserves a careful look rather than a default tick.
The common deductions, grouped simply. Beyond HRA, here are the ones most salaried people can use on the old regime.
- Investments and payments under the main 1.5 lakh rupee limit (commonly called Section 80C): things like provident fund, tax-saving funds and life insurance premium.
- Health insurance premium you pay for yourself and family.
- Home loan interest on a housing loan.
- The extra pension-account deduction of up to 50,000 rupees, through NPS.
- A flat standard deduction, available to salaried people on both regimes with no bills to submit.
A rupee example. Suppose you pay 20,000 rupees a month in rent and invest 1.5 lakh rupees a year (an illustration). On the old regime, part of your rent allowance plus the investment limit could cut your taxable income noticeably. On the new regime, you would lose both but pay lower rates. Which wins depends on your exact numbers, so it is worth running both.
The takeaway. Deductions like HRA can meaningfully lower a salaried person’s tax, but almost all of them live on the old regime. Pick the regime first, then use every deduction that regime allows. And because the amounts and rules change, confirm the current figures before you file.
More to read: old versus new tax regime, the main tax-saving deductions, and NPS, for the extra deduction.
Questions people ask
What is HRA and who can claim it?
HRA, the House Rent Allowance, is a part of many salary packages. If you actually live in rented accommodation and pay rent, a portion of your HRA can be exempt from tax, which lowers what you owe. It is available on the old tax regime, not the new one, and only if you genuinely pay rent. The exempt amount is the lowest of three set formulas, so the exact figure depends on your salary, your rent and your city.
What are the most common tax deductions for a salaried person?
On the old regime, the usual ones are: investments and payments under the 1.5 lakh rupee limit (commonly called Section 80C), health insurance premium, home loan interest, the extra pension-account deduction, and the house rent allowance if you pay rent. There is also a flat standard deduction. Most of these apply only on the old regime, so the regime you pick decides which you can use.
Can I claim deductions in the new tax regime?
Mostly no. The new regime, which is now the default, removes most deductions including the investment limit, health insurance premium and HRA, in exchange for lower tax rates. It does keep a standard deduction. So the choice is really between lower rates with few deductions, or higher rates with the deductions, whichever leaves you paying less.
Is HRA available in the new tax regime?
No. The house rent allowance exemption is only available on the old regime. On the new regime you cannot claim it, even if you pay rent. If rent is a big part of your spending, that is one thing to weigh when choosing your regime.
How much standard deduction can a salaried person claim?
A flat standard deduction is available to salaried people and pensioners on both regimes, with no bills to submit. The exact amount differs by regime and is revised in Budgets, so check the current figure on incometax.gov.in before you file.
Sources
- Income Tax rules on HRA, deductions and the two regimes Amounts and section numbers change, and the law was recently rewritten; verify current figures on incometax.gov.in.