High salary, higher tax risk: How HRA still tilts the old vs new regime decision

In January, human resource departments across companies ask employees who have chosen the old tax regime to furnish proof of having made tax-saver investments during the year. Typically, employers do not allow employees to change the regime chosen at the beginning of the financial year; such employees can switch to the regime of their choice at the time of filing returns. Any failure to submit investment proofs leads to additional tax outgo in the last three months of the financial year.

This move has become less significant over the years, as per data from Cleartax, an income tax advisory firm. Cleartax observes that 74.58% of individuals have adopted for the new tax regime (NTR), while only 24.92% continue with the old structure. “The default choice for the Indian taxpayer has fundamentally changed, moving away from complex compliance towards higher in-hand liquidity. This roughly 3:1 split confirms that, for the vast majority, the immediate benefit of lower tax rates and a simplified structure now far outweighs the traditional appeal of deduction-heavy tax planning,” says Archit Gupta, Founder and CEO, Cleartax.

The tilt towards the new tax regime is expected to get more pronounced in 2025-26, after the significant tax cuts announced in Budget 2025 took effect this year. “Going forward, frequent intimations, emails and SMS alerts from the income tax department flagging deduction-related errors, coupled with the simplicity and litigation-free nature of the new tax regime, will prompt nearly 95% of taxpayers—especially salaried individuals—to switch,” says Vivek Jalan, Partner, Tax Connect Advisory Services. However, if you have chosen to stay with the old tax regime, here’s a quick guide to getting your tax planning right this year.


Old vs new tax regime
Genuine deductions, watertight documentation are your defence against I-T scrutiny

New regime

• Lower tax rates, higher tax rebate
• For those with minimal tax breaks
• No HRA exemption
• Limited tax sops, so no proofs needed
• Simple, hassle-free ITR filing

Old regime

• Multiple tax benefits
• Suited for those with higher incomes, deductions
• High HRA, rent can tilt scales in its favour
• Claim only genuine deductions, maintain proof
• Maintain rent agreement, receipts to claim HRA

Old vs new tax regime

• Withhold TDS on rent if it exceeds Rs.50,000 a month
• Tax planning a must to optimise capital gains tax rules
• Salary structure with reimbursements can reduce tax
• Use the tax break on employers’ contribution to NPS

Optimise deductions under the old regime

Tax experts say that a large section among the old tax regime faithfuls consists of high earners, with incomes of over Rs.24 lakh and cumulative tax deductions of over Rs.8 lakh per year (for lower-income groups, this threshold is even lower). To be sure, even if a taxpayer were to exhaust popular tax deductions under Section 80C (Rs.1.5 lakh), Section 80D (health insurance premiums, maximum Rs.1 lakh), Section 24B (home loan interest, Rs.2 lakh), she would fall short of this mark. It’s the house rent allowance (HRA) exemption that will make the difference, particularly for high-income earners. This is because there is no absolute cap on HRA claims. It is the lower of: (a) actual HRA received, (b) 50% of basic salary (40% in non-metros), (c) actual rent paid minus 10 % of basic salary. Therefore, someone paying a rent of even Rs.50,000 per month (Rs.6 lakh a year), which is par for the course in metro cities like Mumbai, will be able to breach the Rs.8 lakh mark with some help from tax benefits under other sections.

Then, there are those who stay with their parents and pay them rent. You can use this provision to reduce tax outgo, provided your parents disclose the rent received in their income tax return (ITR).

Maintain proof meticulously

While you can also claim deductions at the time of filing ITR in July, it is best to complete the process and submit proof that your employers ask for, to avoid excess tax deduction and also income tax department queries.

During the assessment year 2025-26 (financial year 2024-25), many salaried taxpayers have received intimations, emails, or alerts from the income tax department flagging possible discrepancies in their ITRs. This includes disclosures related to HRA and rent. “If your rent is over Rs.50,000 a month, you have to withhold 2% TDS before paying the amount to your landlord by March, a key requirement that many tenants overlook. This is irrespective of the income tax regime that you may have chosen,” says Chartered Accountant Nitesh Buddhdev, Founder, Nimit Consultancy.

If you pay rent to your parents and claim HRA exemption, you should have notarised rent agreements in place, in addition to rent receipts. Documentary proofs of tax-saver investments and insurance premiums paid, as well as home loan principal and interest paid, are relatively easier to preserve and obtain, if need arises. Also, preserve copies of receipts for any donations made and deductions claimed under Section 80G. Foolproof documentation will ensure that you can submit your accurate feedback through the official ITR e-filing portal and respond to notices, should the need arise.

Maximise tax breaks in NTR

Unlike the old tax regime, NTR offers minimal exemptions, though the rebate under Section 87A is significantly higher—Rs.12 lakh versus Rs.5 lakh under the old regime. The basic exemption limit has also been raised to Rs.4 lakh from 2025–26, alongside more liberal tax slabs. However, fewer deductions do not eliminate the need for tax planning. “Under the NTR, deductions are limited, but salaried taxpayers are still finding smart ways to optimise their tax outgo. Many professionals are restructuring their cost-to-company (CTC) so employers contribute up to 14% of basic salary to the National Pension System (NPS), thereby reducing taxable income,” says Gupta. Employers and employees are also redesigning salary structures to include permissible reimbursements under the new framework, helping lower taxable salary.

Tax planning is critical in NTR too

With growing retail participation in equity markets, salaried individuals need to closely track, report, and optimise their capital gains tax obligations. For example, say, the gold exposure in your portfolio has increased due to soaring prices and has impacted your asset allocation, and you feel the need to rebalance by selling part of your gold holdings. Planning ahead with the tax-harvesting strategy can minimise your capital gains tax outgo this financial year. “Investors can book equity losses and repurchase similar equity assets after two days to legally offset gains from gold holdings. This strategy applies to physical gold, gold ETFs and other gold-related investments, allowing tax-efficient portfolio rebalancing,” says Buddhdev. The only caveat is that short-term capital losses can be set off against both longterm and short-term capital gains, whereas long-term capital losses can be set off only against long-term capital gains.

He cautions against the tendency of some salaried individuals to neglect tax planning altogether. “In the case of many taxpayers, the loss of mandatory tax-saving investments has reduced overall personal savings discipline, impacting long-term wealth accumulation. Many simply try to time the market rather than sticking to their long-term financial plan and discipline,” he adds.