Higher HRA, bigger deductions? Why the old tax regime may work only for select salaried taxpayers
New draft rules for the Income Tax Act, 2025, are sparking a debate between old and new tax regimes. Salaried taxpayers may find the old regime more beneficial if they can utilise exemptions like house rent allowance and other deductions. The prop...
Meaningful gains under the old tax regime hinge largely on HRA—and not everyone may qualify.
Since Budget 2025, the new tax regime has clearly eclipsed the old for most income groups, aided by friendlier slabs and lower rates. But the Income Tax Act, 2025 draft rules, released by the Central Board of Direct Taxes (CBDT) on 7 February, have revived the old versus new debate, especially among salaried taxpayers.
Despite the growing buzz around a comeback for the old regime, calculations suggest that those earning over Rs.25 lakh would save only about Rs.21,000-25,000—even after fully utilising the proposed exemptions—if the draft rules are implemented as is.
The one exemption that can meaningfully tilt the balance remains the house rent allowance (HRA), which is the key differentiator under the current Income Tax Act, 1961 as well.
The proposal
When the new Income Tax Act, 2025 was enacted last year, the objective was to simplify the language, reduce compliance burdens and litigation, and eliminate obsolete rules and forms under the existing Income Tax Act, 1961. These will be finalised after evaluating feedback from all stakeholders and implemented from 1 April 2026.
However, the unexpected upward revision to exemption limits— reflecting inflation over the years—in the rules could prompt a reworking of the tax calculations. If finalised in the current form, the tax-free caps on several employer-provided allowances will increase significantly.
For example, monthly allowance limits for children’s education and hostel expenses will increase from `100 and `300 to `3,000 and `9,000, respectively (per child, maximum two children). Likewise, the tax-free limit per meal or refreshment benefit will increase from `50 to `200. These benefits are allowed only under the old tax regime.
The proposals are likely to benefit specific segments of taxpayers – for example, salaried employees of companies that offer such exemptions, parents with two children in hostels and those living on rent and claiming HRA. “Thus, only a limited set of taxpayers will be able to fully utilise the exemptions allowed,” says Himank Singla, Founding Partner, SBHS & Associates, a chartered accountancy firm.
Old tax regime’s comeback?
For salaried employees with taxable incomes of up to Rs.12.75 lakh, the new regime remains the natural choice, as their tax outgo will be nil due to the rebate.
For incomes of around Rs.25 lakh or more, the break-even point — the minimum deduction level at which tax outgo under both regimes is the same—is Rs. 8 lakh, plus the standard deduction of Rs.50,000 under the old structure. Higher deductions will yield greater tax benefits. Assuming they exhaust the allowances and deductions available under the old regime and the new draft rules, their tax breaks could increase to up to Rs.8.68 lakh, shifting the balance in favour of the old regime.
For example, an employee with a gross salary of Rs.25 lakh avails of children’s education and hostel allowance for two kids (total Rs.2.88 lakh), 44 meals per month at Rs.200 per meal (Rs.1,05,600 a year), as permitted under the proposed rules. In addition, she claims deductions for tax-saver investments (Rs.1.5 lakh), health insurance premiums for herself and her parents (Rs.75,000), home loan interest (Rs.2 lakh), and own National Pension System (NPS) contributions (Rs.50,000). She will be able to breach the break-even level of Rs.8 lakh (plus standard deduction of Rs.50,000) with ease, which is not the case at present. Her tax outgo under the old regime will be lower by nearly Rs.21,000 compared with the new, minimalexemption regime.
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The calculations do not factor in other tax breaks such as interest on education loan (entire amount allowed as deduction), disability and critical ailment related deductions ( Rs.75,000-1.25 lakh), donations made to charitable organisations and political parties, and so on. These could also help tilt the balance towards the old regime.
Theoretically, those earning around Rs.15 lakh will see their tax outgo vanish, as the cumulative deductions and exemptions will bring their taxable income below Rs.5 lakh, the rebate limit under the old regime. However, practically, locking away a large chunk of their salary into tax-saver investments or large insurance premiums will be a challenge.
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Also, given that children’s education and hostel allowances account for a significant share of the revised exemptions, only employees with two children, both staying in hostels, can exhaust the proposed thresholds.
Salaried employees living in rented accommodation and claiming HRA
Parents with two children, both of whom live in hostels
Higher HRA exemption limit for employees in Bengaluru, Hyderabad, Pune and Ahmedabad
Individuals with large deductions (home loan interest + insurance + NPS)
Take note
Higher exemption limits will not necessarily translate into significant savings under the old regime
For high earners, HRA will remain source of meaningful tax savings
Many taxpayers will continue to benefit from the new regime’s simplicity, lower rates
Who sees little benefit
High earners without HRA
Employees with rigid salary structures across the organisation
Taxpayers who want to avoid extensive paperwork, risk of I-T queries
Professionals working in companies that offer simplified CTC structures
More liberal exempt allowances Children’s education allowance @Rs.3,000 per child per month, - Up from Rs.100 Hostel expenditure @Rs.9,000 per child per month - Up from Rs.300 Meal/refreshment @Rs.200 per meal - Up from Rs.50 (Available only in the old regime)
Deciding factor
Choose old regime if: You claim HRA + multiple deductions Choose new regime if: You claim limited exemptions, want simplicity and minimal paperwork
Employers’ discretion
Many corporates don’t offer all exempt allowances
Allowance amounts depend on employee grade, domain
Salary restructuring may happen slowly, not immediately
Higher compliance burden
Scrutiny now stricter for HRA, other deductions
Rent paid to parents must be documented
Old regime requires investment proof submission
More paperwork during ITR filing
HRA the clincher
The exemption that truly moves the needle is HRA, as there is no absolute cap on the eligible amount (see graphic). The deduction is the lowest of: actual HRA received; 50% of basic salary (40% in non-metros); or rent paid minus 10% of basic salary. With Bengaluru, Pune, Hyderabad and Ahmedabad set to be treated on par with Delhi, Mumbai, Chennai and Kolkata, salaried tenants in these cities could claim higher HRA exemption from 1 April. Those living in rented accommodation and claiming HRA stand to benefit the most. For instance, an individual earning Rs.25 lakh annually and paying about Rs.52,000 a month in rent in Mumbai could save roughly Rs.1.54 lakh in tax under the old regime. In such cases, the savings are significant enough to tilt the choice in favour of the old regime. The calculations (graphic) do not account for HRA when the tax break on home loan interest on self-occupied property is claimed and vice versa. “Without HRA, the tax savings under the old regime will not be substantial enough to justify a shift away from the much simpler new tax regime,” says Singla.
HRA tips the scales in old vs new debate Old regime likely to be beneficial if rules are finalised, but high earners without HRA will see modest savings vs paperwork trade-off. Notes and assumptions: 1. *Assuming the proposed rules related to the new Income Tax Act, 2025 are finalised in their current form and implemented from 1 April 2026. 2.* Deductions and exemptions include children’s education allowance and hostel expenses worth Rs.2.88 lakh (for two children), meal benefits worth Rs.1,05,600 (two meals for 22 days @Rs.200 per meal) and home loan interest paid of Rs.2 lakh. 4. The illustration is structured to analyse the tax benefits available to individuals across different income levels when all deductions and exemptions are fully utilised. 5. ^HRA (50% of basic for a Mumbai-based employee)/actual HRA paid is assumed to be fully allowed as exemption. 6. The calculations do not take into account HRA when the tax break on home loan interest on self-occupied property is claimed and vice-versa. 7. #Tax-savings calculations factor in standard deductions of Rs.50,000 under the old regime and Rs.75,000 under the new regime. 8. Corporate NPS has not been taken into account. 9. Up to salary of Rs.12.75 lakh, the new regime will be beneficial as tax rebate ensures nil tax payable. 10. Without HRA, new regime is beneficial for incomes over Rs.5 crore as the surcharge is lower at 25% vs 37% under the old regime.
The math is simple, reality isn’t
Also, all these exemptions are not universally offered by corporates as part of cost-to-company (CTC) structures. “Most common ones are HRA, LTA and meal allowances. Children’s education has been a focus of the public sector and older private organisations. Around 10-15% of corporates in India offer these benefits. Hostel allowance is available only to companies that work with migratory field staff. Newer companies are focusing on building salary structures that provide more cash in hand,” says Neeti Sharma, CEO, TeamLease Digital, an HR consultancy firm. According to tax consultancy firm ClearTax Founder and CEO Archit Gupta, allowances for children’s education and hostel expenses tend to form part of government and PSU employees’ CTC. “Many private organisations, including the tech sector, use meal cards to boost and improve take-home pay. In manufacturing, remote sites often provide food and hostel facilities for staff,” he adds.
Lower exemption thresholds are the primary reason the use of such allowances is limited. “If these rules are implemented, corporates could restructure pay structures to include these allowances,” he says.
However, employees should not expect large-scale pay restructuring in their favour. “Employers may gradually tweak salary structures to improve tax efficiency without raising overall CTC, mainly by expanding flexible benefits or reintroducing certain allowances,” says Sharma.
Your employer’s salary structure can significantly influence your tax outgo. Though the arithmetic may favour the old regime if the draft rules are finalised, not all exemptions may be available to every employee. “Employers design pay structures for tax efficiency, often giving junior employees more exemption-linked components,” says S.R. Patnaik, Partner (Head–Taxation), Cyril Amarchand Mangaldas.
Ankit Jain, Partner, Ved Jain and Associates, expects a gradual shift towards flexible benefit plans, allowing employees to choose specific exemptions such as enhanced education or hostel allowances. However, he cautions that exclusions cannot exceed 50% of gross pay under the Labour Code, limiting aggressive tax structuring due to higher provident fund and gratuity liabilities.
Beware of taxman’s call
In recent years, the income tax department has, with the help of data analytics and artificial intelligence (AI) tools, ramped up scrutiny of HRA claims, donations to political parties and other deductions claimed. This has resulted in many salaried taxpayers receiving notices asking them to provide proof of the tax breaks they availed.
For example, claiming HRA while living in your parents’ house can invite scrutiny unless you have a valid rent agreement, receipts, and your parents report the rent as income in their ITR. Nearly 75% taxpayers chose the simplicity and lower rates offered by the new regime over the compliance-heavy old regime in the assessment year 2025-26.
Ultimately, individual taxpayers must weigh whether the old regime’s savings justify the higher compliance burden, including more paperwork, documentation, and return filing requirements.
