HRA & Tax Benefits in Budget 2025-26 – Latest Updates, Exemptions & Savings

Introduction: House Rent Allowance (HRA) in Budget 2025-26 – Tax Benefits & Updates

For many salaried employees in India, House Rent Allowance (HRA) is a crucial component of their salary structure, offering significant tax benefits. HRA is provided by employers to help employees manage rental expenses while also allowing them to claim tax exemptions under Section 10(13A) of the Income Tax Act. With the rising cost of housing, HRA plays a vital role in reducing an individual’s taxable income, ultimately lowering their overall tax burden.

However, Budget 2025-26 has brought notable changes to taxation policies, affecting salaried employees and landlords alike. The introduction of higher Tax Deducted at Source (TDS) exemption limits on rental income, adjustments in HRA deductions, and the continued shift towards the new tax regime have left many taxpayers wondering about the best financial strategy. This blog provides a detailed insight into HRA tax benefits, key changes in Budget 2025-26, and what salaried individuals need to know to maximize their savings.

What is House Rent Allowance (HRA)?

HRA is a special allowance given to salaried employees to help cover rental expenses. It is a significant tax-saving tool because it allows employees to deduct a portion of their rent from taxable income, provided they meet specific eligibility criteria. The exemption is calculated based on basic salary, actual rent paid, HRA received, and the city of residence (metro or non-metro).

Under the Income Tax Act, HRA exemptions depend on the following conditions:

The employee must live in a rented house and provide valid rent receipts.
HRA tax exemption is calculated as the least of the following three amounts:
- Actual HRA received from the employer.
- 50% of the basic salary (for metro cities) or 40% (for non-metro cities).
- Actual rent paid minus 10% of basic salary.
If an employee lives with parents and pays rent, they can still claim HRA, provided they have proper documentation.

Why Does HRA Matter for Tax Savings?

With rental prices surging across major Indian cities, HRA can significantly reduce an employee's tax liability. Employees opting for the old tax regime can continue to claim HRA exemptions, while those choosing the new tax regime forgo these deductions in exchange for lower tax rates.

For example, a salaried individual earning ₹10 lakh annually and paying ₹20,000 in monthly rent in a metro city can claim a substantial HRA exemption, reducing taxable income and saving thousands in taxes.

Impact of Budget 2025-26 on HRA and Rental Taxation

The Union Budget 2025-26 has introduced several taxation changes affecting HRA, rental income, and housing benefits:

HRA Exemption Under the New Tax Regime: Employees opting for the new tax regime will not be eligible for HRA deductions, making it essential to compare regimes before filing taxes.
TDS on Rental Income Increased: The TDS exemption limit on rent has been raised from ₹2.4 lakh to ₹6 lakh, offering relief to landlords while streamlining compliance.
Housing Benefits for Middle-Class Renters: The government has announced affordable rental housing schemes, making it easier for employees to manage accommodation costs.

HRA Tax Exemption Rules in India: How to Maximize Your Tax Savings in 2025

House Rent Allowance (HRA) is one of the most beneficial tax-saving components for salaried employees in India. Under Section 10(13A) of the Income Tax Act, employees who live in rented accommodations can claim HRA tax exemptions, significantly reducing their taxable income. However, with the introduction of the new tax regime and changes announced in Budget 2025-26, it is crucial to understand the HRA exemption rules, eligibility criteria, and how different tax regimes affect your benefits.

How is HRA Exemption Calculated?

The HRA tax exemption is determined based on the lowest of the following three amounts:

Actual HRA received from the employer.
50% of the basic salary (for metro cities like Delhi, Mumbai, Kolkata, and Chennai) or 40% of the basic salary (for non-metro cities).
Actual rent paid minus 10% of basic salary.

Example Calculation:

Let’s assume a salaried individual with the following details:

Basic Salary: ₹50,000 per month
HRA Received: ₹25,000 per month
Rent Paid: ₹20,000 per month
City: Metro

Calculation:

Actual HRA received: ₹25,000 × 12 = ₹3,00,000
50% of Basic Salary (for metro cities): ₹50,000 × 12 × 50% = ₹3,00,000
Actual rent paid minus 10% of Basic Salary: (₹20,000 × 12) - (₹50,000 × 12 × 10%) = ₹2,40,000 - ₹60,000 = ₹1,80,000

Since the lowest value among these is ₹1,80,000, this will be the exempted amount from taxable income. The remaining portion of HRA received is taxable.

Eligibility Criteria for HRA Exemption

To claim HRA tax benefits, employees must meet the following eligibility requirements:

✅ Must be salaried and receive HRA as part of the salary package.
✅ Must live in a rented house and provide valid rent receipts.
✅ Rent must be paid to a landlord, and if paying rent to parents, proof of financial transactions (like bank transfers) is required.
✅ PAN of landlord required if annual rent exceeds ₹1 lakh.

HRA Exemption in Old vs. New Tax Regime

The biggest change in HRA exemption came with the introduction of the new tax regime, where HRA tax benefits are NOT available. Let’s compare both tax regimes:

Tax Regime	HRA Exemption	Other Deductions (e.g., 80C, 80D)	Applicable Tax Rates
Old Regime	✅ Available	✅ Available	Higher
New Regime	❌ Not Available	❌ Not Available	Lower

Which Regime is Better for You?

If your HRA exemption + 80C deductions (PF, LIC) + 80D (health insurance) + home loan interest save more than the tax difference, the old regime is better.
If you do not have major deductions, the new regime with lower tax rates may be beneficial.

With Budget 2025-26 increasing the standard deduction in the new tax regime, taxpayers must carefully analyze their savings before choosing the best tax structure.

HRA Changes in Budget 2025-26: Key Updates for Salaried Taxpayers

The Union Budget 2025-26 has introduced several changes that impact House Rent Allowance (HRA) exemptions, standard deductions, and rental tax policies. These updates are especially significant for salaried taxpayers and individuals relying on HRA tax benefits for rent deductions.

Let’s take a closer look at the key changes:

1. Is HRA Exemption Still Available Under the New Tax Regime?

One of the most significant changes in Budget 2025-26 was the continued preference for the new tax regime, which comes with lower tax rates but does not allow exemptions such as HRA, 80C, or 80D deductions.

✅ Old Tax Regime: HRA exemption remains available.
❌ New Tax Regime: No HRA exemption is provided.

The government has not reinstated HRA deductions under the new tax regime, encouraging more taxpayers to switch to the simplified tax structure with lower slabs. However, taxpayers who benefit significantly from HRA exemptions and other deductions may still prefer to stay in the old tax regime.

2. Increase in Standard Deduction and Changes in Rental Deductions

To compensate for the lack of HRA benefits under the new tax regime, Budget 2025-26 has increased the standard deduction for salaried employees and pensioners:

🔹 Standard Deduction Increased to ₹60,000 (previously ₹50,000).
🔹 No specific new rental deductions, but an increase in tax rebate limits has been announced.

While HRA deductions are still missing in the new regime, the higher standard deduction could provide relief to middle-class salaried individuals. Those in the old tax regime can continue to claim HRA deductions separately.

3. Higher Tax Deduction at Source (TDS) Exemption Limits for Rental Income

For individuals who receive rental income, Budget 2025-26 has introduced a higher TDS exemption limit:

📌 New TDS exemption limit for rental income: ₹3,50,000 (earlier ₹2,40,000).

This means landlords and property owners earning rental income below ₹3.5 lakh per year will not be subject to TDS deductions. The government aims to reduce compliance burdens for small landlords while improving tax collection from higher rental income brackets.

4. Government Initiatives for Affordable Rental Housing

The government has also focused on affordable rental housing as part of its urban development initiatives.

🏠 Affordable Rental Housing Schemes:

Tax benefits for builders and developers of affordable rental projects.
Incentives for companies providing employee rental accommodations.
Lower GST rates for specific rental housing projects.

📌 PM Awas Yojana (Urban) Expansion:

Additional subsidies for low- and middle-income tenants.
Public-private partnerships to develop rental homes in urban areas.

Conclusion: What Should Taxpayers Do?

✔️ If you benefit from HRA deductions, continue using the old tax regime.
✔️ If you prefer simpler tax calculations with lower rates, opt for the new tax regime with an increased standard deduction.
✔️ If you earn rental income, check the new TDS exemption limits to avoid unnecessary deductions.
✔️ If you are a salaried individual paying rent but not receiving HRA, consider other deductions like Section 80GG for tax relief.

TDS on Rent & Tax Relief for Landlords in Budget 2025-26

The Union Budget 2025-26 has brought significant changes to Tax Deducted at Source (TDS) on rent, especially benefiting landlords and tenants. One of the most impactful announcements is the increase in the TDS exemption limit from ₹2.4 lakh to ₹6 lakh per year, providing much-needed relief for small landlords and easing tax compliance for rental income earners.

1. Increased TDS Exemption Limit: A Big Relief for Landlords

Previously, under Section 194-I of the Income Tax Act, individuals and businesses paying rent above ₹2.4 lakh per year (₹20,000 per month) had to deduct TDS at 10% before paying the landlord.

🔹 New TDS Exemption Limit: ₹6 lakh per year (₹50,000 per month)
🔹 Earlier TDS Exemption Limit: ₹2.4 lakh per year (₹20,000 per month)

📌 What This Means for Landlords?
✅ Landlords earning up to ₹6 lakh per year from rent will no longer face TDS deductions.
✅ Reduced compliance burden for smaller property owners.
✅ Higher rental income without unnecessary tax deductions at source.

📌 What This Means for Tenants?
✔️ Tenants paying rent below ₹50,000 per month will not have to deduct TDS.
✔️ Tenants paying rent above the new threshold must still deduct 10% TDS before making payments.
✔️ Less documentation and compliance for most salaried individuals renting homes.

2. Benefits for Landlords Earning Rental Income from Residential Properties

🏡 Key Tax Benefits Introduced for Landlords:

Higher tax-free rental income limit before TDS applies.
Standard deduction on rental income remains at 30% under Section 24(b).
If the property is financed with a home loan, landlords can claim interest deductions up to ₹2 lakh per year.
Landlords with multiple properties can still offset rental losses against other taxable income.

💡 Example:

If a landlord earns ₹5.5 lakh annually from rent, they won’t face TDS deductions anymore (earlier, TDS would be deducted above ₹2.4 lakh).
However, if their rental income is ₹7 lakh, only the amount above ₹6 lakh (i.e., ₹1 lakh) will be subject to TDS at 10%.

3. Impact on Tenants Paying Rent Above the Threshold

For tenants paying rent above ₹50,000 per month, the TDS rule remains unchanged, meaning:
✅ They must deduct 10% of rent before transferring payment to the landlord.
✅ File a TDS return (Form 26QC) and deposit the deducted tax with the government.
✅ Provide Form 16C to the landlord as proof of TDS payment.

💡 Example:

If you pay ₹60,000 rent per month, you must deduct ₹6,000 (10%) as TDS and pay ₹54,000 to your landlord.
File TDS returns (Form 26QC) online to avoid penalties.

Conclusion: Who Benefits the Most?

✔️ Small landlords benefit significantly as they no longer face TDS deductions up to ₹6 lakh rental income.
✔️ Tenants renting properties below ₹50,000 per month get relief from TDS compliance.
✔️ Higher rental income earners (above ₹6 lakh per year) will still need to manage TDS deductions properly.

HRA vs. Home Loan Benefits – What’s Better in 2025?

The Budget 2025-26 has brought several updates to tax policies on rental housing and home loans, making it essential for salaried individuals to reassess their financial decisions. Whether to continue renting and claim House Rent Allowance (HRA) benefits or invest in a home using home loan tax deductions depends on various factors, including tax savings, new tax slab rates, and financial goals.

1. HRA Tax Benefits vs. Home Loan Tax Deductions

Criteria	HRA Exemption (Renting)	Home Loan Tax Deductions (Buying)
Tax Deduction Section	Section 10(13A)	Section 80C, 24(b), and 80EEA
Maximum Deduction	Varies (Calculated based on salary, rent paid, and city)	₹1.5 lakh (80C) + ₹2 lakh (24b) + ₹1.5 lakh (80EEA for first-time buyers)
Who Can Claim?	Salaried employees living in rented accommodation	Homeowners paying EMIs on housing loans
Additional Savings	Not applicable	Interest component deductible under Section 24(b)
Flexibility	No long-term commitment	Long-term investment
Best For	Individuals frequently relocating due to job changes	Individuals looking for stability and wealth creation

2. Should Salaried Employees Continue Renting or Buy a House?

With the Budget 2025-26 introducing potential rental tax deductions and revised tax slabs, individuals need to analyze whether paying rent or buying a home is financially beneficial.

📌 When Should You Choose HRA (Renting)?
✔️ If your job requires frequent relocation, renting is a better option.
✔️ If you live in a metro city with high property prices, where home loan EMIs are expensive.
✔️ If you are in the new tax regime (which doesn’t allow HRA exemption).
✔️ If interest rates on home loans are high, making EMIs costlier.

📌 When Should You Opt for a Home Loan (Buying)?
🏡 If you are eligible for tax deductions under Section 80C and 24(b), home loans provide better savings.
🏡 If property prices in your city are stable and EMIs are lower than your current rent.
🏡 If you prefer wealth creation through real estate investment.
🏡 If you want to build an asset for long-term financial security.

3. Tax Planning Strategies Based on New Tax Slab Rates & Rental Deductions

The Budget 2025-26 has revised income tax slabs, affecting how individuals should plan their tax-saving strategies.

✔️ Under the Old Tax Regime (HRA Benefits Allowed)

If you are a salaried individual, continue renting and claim HRA exemption to maximize tax savings.
If you are paying a high rent, ensure your salary structure includes HRA.

✔️ Under the New Tax Regime (No HRA Benefits)

Opt for a home loan to take advantage of Section 80C, 24(b), and 80EEA deductions.
Consider buying if your loan EMI is manageable within your income.

Conclusion: Which Option is Better in 2025?

🏡 If you prefer stability and long-term investment, buying a home with a loan is a better option.
🏠 If you need flexibility and lower upfront costs, renting with HRA benefits is ideal.

📌 Steps to Claim HRA Tax Benefits in ITR

Follow these steps to maximize your HRA exemption while filing income tax returns:

Step 1: Check Your HRA Eligibility

✔️ Ensure you are a salaried employee receiving HRA as part of your salary.
✔️ You must be living in a rented house and paying monthly rent.
✔️ Your rent payment should be to a landlord, not a family member (like parents or spouse).

Step 2: Calculate HRA Exemption

HRA exemption is calculated based on the least of the following three amounts:

1️⃣ Actual HRA received (as per salary structure).
2️⃣ 50% of basic salary + DA (if living in a metro city) OR 40% (for non-metro cities).
3️⃣ Rent paid – 10% of basic salary + DA.

💡 Example Calculation:

Basic Salary = ₹50,000
HRA Received = ₹20,000
Rent Paid = ₹18,000
City = Metro (50% of ₹50,000 = ₹25,000)

HRA Exemption = Least of
✅ HRA received = ₹20,000
✅ 50% of basic salary = ₹25,000
✅ (Rent ₹18,000 – 10% of ₹50,000) = ₹13,000

💰 Final HRA exemption = ₹13,000 per month (₹1,56,000 per year).

Step 3: Submit Required Documents

To claim HRA exemption, you must submit the following documents:

📌 Rent Receipts:
✔️ Obtain monthly rent receipts signed by your landlord.
✔️ Must include landlord’s name, rent amount, address, PAN (if required), and tenant’s name.

📌 Rent Agreement:
✔️ If your employer requires proof of rent payments, a valid rent agreement is essential.

📌 PAN of the Landlord (if rent exceeds ₹50,000 per month):
✔️ If your rent is more than ₹50,000 per month, you must provide your landlord’s PAN details to claim HRA benefits.

📌 Bank Statement or Payment Proof:
✔️ If you pay rent via bank transfer, cheque, UPI, or online payment, keep the payment records.

Step 4: Claim HRA While Filing ITR

✔️ Select the appropriate ITR Form (usually ITR-1 or ITR-2 for salaried individuals).
✔️ Fill in salary details under ‘Income from Salary’ in the tax filing portal.
✔️ Enter HRA exemption amount under the ‘Exemptions under Section 10’.
✔️ Upload supporting documents (if required by IT Department in case of scrutiny).
✔️ Review and file your ITR before the due date to avoid penalties.

🚨 Common Mistakes While Claiming HRA & How to Avoid Them

❌ Rent Paid to Family Without Proof

✅ The IT Department does not allow HRA claims if rent is paid to parents/spouse without valid proof. Ensure you have a proper rent agreement and bank transactions to support your claim.

❌ Not Keeping Rent Receipts & PAN of Landlord

✅ If rent exceeds ₹50,000 per month, PAN of the landlord is mandatory. Keep all rent receipts for reference.

❌ Claiming HRA While Owning a House in the Same City

✅ If you own a house in the same city where you work, claiming HRA without valid justification can lead to tax scrutiny. You must prove why you are staying in a rented property (e.g., work location far from owned property).

❌ Using Fake Rent Receipts

✅ Submitting fake rent receipts to evade tax can result in penalties and legal action by the Income Tax Department.

❌ Not Filing ITR on Time

✅ Always file ITR before the due date to claim HRA exemption smoothly.

💡 Conclusion: Maximize Your HRA Tax Savings!

Claiming HRA tax exemption correctly can significantly reduce your taxable income, especially if you are in a higher tax bracket. By understanding the rules, submitting the right documents, and avoiding common mistakes, you can make the most of HRA benefits under the new Budget 2025-26 tax regime.

Steps to File HRA Claims in Income Tax Returns (ITR)

1️⃣ Check Your Salary Slip

Ensure your salary structure includes an HRA component.
If your employer does not provide HRA, you cannot claim an exemption under Section 10(13A) but may explore Section 80GG (for self-employed or non-HRA salary earners).

2️⃣ Calculate HRA Exemption Amount
The exemption is the minimum of the following three amounts:

Actual HRA received from the employer.
50% of basic salary (for metro cities) or 40% (for non-metro cities).
Actual rent paid – 10% of basic salary.

3️⃣ Submit Required Documents to Your Employer

Rent receipts (if rent paid is above ₹3,000 per month).
Landlord’s PAN (if rent exceeds ₹50,000 per month).
Rental agreement (if requested by the employer).

4️⃣ Claim HRA Exemption While Filing ITR

If your employer has already considered HRA in Form 16, verify it while filing your ITR.
If HRA was not accounted for, manually claim it under ‘Exempt Income’ in the tax return form.

Required Documents for HRA Exemption

📌 Rent Receipts

Essential for claiming HRA benefits.
Must contain tenant’s name, landlord’s name, rent amount, rental period, and signature.

📌 Landlord’s PAN Card

If annual rent exceeds ₹1,00,000, providing the landlord’s PAN is mandatory.
If the landlord does not have a PAN, they must submit a declaration stating the same.

📌 Lease Agreement

Helps in cases of income tax scrutiny.
Provides legal proof of rent paid and tenancy terms.

📌 Bank Statements

If payment was made online or via bank transfer, bank statements serve as supporting evidence.

Common Mistakes to Avoid While Claiming HRA

❌ Fake Rent Receipts

Many employees submit fabricated receipts without actual rent payment.
The IT department can verify transactions, leading to penalties.

❌ Claiming HRA While Living in Own House

HRA cannot be claimed if you own and live in the same house.
You can, however, claim home loan benefits instead.

❌ Not Reporting Rent Paid to Parents Properly

If you pay rent to your parents, maintain rent receipts and bank transactions as proof.
The rent must be reported as income in your parents' tax returns.

❌ Not Updating PAN of Landlord

If rent exceeds ₹1,00,000 per year and landlord’s PAN is not provided, the claim may be rejected.

FAQs on HRA and Budget 2025-26

Q1: Can I claim HRA under the new tax regime in 2025?

✅ No, HRA exemptions are only available under the old tax regime. The new tax regime does not allow deductions for HRA, home loan interest, or other exemptions.

Q2: Has the government increased HRA exemptions in Budget 2025?

✅ No, there was no specific increase in HRA exemption limits in the Budget 2025-26. However, higher TDS exemption limits on rental income may provide indirect tax relief for tenants and landlords.

Q3: Can self-employed individuals claim HRA tax benefits?

✅ No, self-employed individuals cannot claim HRA under Section 10(13A).
✅ However, they can claim rent deductions under Section 80GG, subject to specific conditions.

Q4: Is rent paid to parents eligible for HRA exemption?

✅ Yes, but only if:
- Rent is actually paid to parents via bank transfer or cheque.
- Valid rent receipts and agreements are maintained.
- Parents declare this rental income in their ITR.
Q5: Can I claim both HRA and home loan benefits?

✅ Yes, but only if you are paying rent in one city while owning a house in another city (e.g., if you are working in Bangalore but own a house in Delhi).

Conclusion

House Rent Allowance (HRA) continues to be a valuable tax-saving tool for salaried employees under the old tax regime. The Budget 2025-26 has brought important updates, including an increase in the TDS exemption limit for rental income, which indirectly benefits both tenants and landlords. However, HRA exemptions remain unavailable in the new tax regime, making it crucial for taxpayers to evaluate their options before filing their tax returns.

For individuals living in rented accommodations, proper documentation—rent receipts, lease agreements, and landlord’s PAN (if applicable)—is essential for claiming HRA tax exemptions. Additionally, those considering whether to rent or buy a home should carefully assess home loan tax benefits against HRA deductions, factoring in their long-term financial goals and the new budget policies.

Key Takeaways from Budget 2025-26 on HRA

✅ HRA remains exempt under Section 10(13A) but only in the old tax regime.
✅ TDS exemption limit for rental income increased from ₹2.4 lakh to ₹6 lakh per year, benefiting landlords.
✅ No changes in HRA exemption limits were announced, but indirect benefits exist.
✅ Self-employed individuals can claim rent deductions under Section 80GG instead of HRA.
✅ Choosing between HRA benefits and home loan deductions depends on personal tax planning strategies.

Consult a Tax Expert Before Choosing the Right Tax Regime

With two tax regimes available, salaried employees must make an informed decision about which one provides the best tax benefits. A wrong choice could lead to higher tax liability and missed deductions. Consulting a financial expert can help optimize HRA claims, home loan benefits, and other exemptions based on individual income and financial goals.

For personalized tax planning, expert consultation, and detailed guidance on HRA, deductions, and compliance, reach out to S Shekhar & Co., a leading tax consultancy firm.

🔍 Visit S Shekhar & Co. for expert tax advice and professional financial planning.