Choosing a Regime for a School Teacher with a Home Loan
Mrs. Sunita Das, aged 44, is an assistant teacher in a private school in Bhubaneswar. Her salary structure for FY 2024-25 is: basic pay ₹6,00,000; dearness allowance ₹1,20,000, being 20% of basic and forming part of retirement benefits; house rent allowance ₹1,44,000. She pays rent of ₹15,000 per month for her residence in Bhubaneswar and professional tax of ₹2,500. Her employer contributed ₹60,000 to her National Pension System account. She invested ₹1,50,000 in Public Provident Fund and paid a mediclaim premium of ₹25,000. Interest on the housing loan for the flat she occupies is ₹2,00,000 for the year. Separately, in November 2024 she received ₹1,20,000 as arrears of salary for FY 2023-24, on which the school deducted tax at source. She has no business income and no other income. She wants to know which tax regime she should choose for AY 2025-26 and whether the arrears deserve separate treatment.
1. Compute her salary income and the house rent allowance exemption, stating the rule applied.
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HRA exemption – least of three amounts (Bhubaneswar is not a metro city for this purpose; only Delhi, Mumbai, Kolkata and Chennai are):
- Actual HRA received: ₹1,44,000
- Rent paid minus 10% of salary: ₹1,80,000 − 10% of ₹7,20,000 = ₹1,80,000 − ₹72,000 = ₹1,08,000
- 40% of salary: 40% of ₹7,20,000 = ₹2,88,000
Exemption = ₹1,08,000. Salary here means basic plus dearness allowance forming part, since no commission is involved.
Salary income, old regime
- Gross salary: ₹8,64,000
- Less HRA exemption: ₹1,08,000
- Less professional tax: ₹2,500
- Less standard deduction: ₹50,000
- Salary income: ₹7,03,500
Note that professional tax is deductible only in the old regime; under section 115BAC it is not allowed, and the standard deduction there is ₹75,000. The arrears of ₹1,20,000 are kept out of this computation and dealt with separately, because they are taxed on receipt in FY 2024-25 and relief under section 89 is a separate computation.
2. Compare her total income and tax under both regimes and recommend one.
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Old regime
- Salary income: ₹7,03,500
- Less loss from self-occupied house property (interest, capped at ₹2,00,000): ₹2,00,000 → ₹5,03,500
- Less 80C ₹1,50,000 + 80D ₹25,000 + 80CCD(2) ₹60,000 (within the 10% of salary cap of ₹72,000) = ₹2,35,000
- Total income: ₹2,68,500
- Tax: (₹2,68,500 − ₹2,50,000) × 5% = ₹925; rebate under 87A wipes it out. Tax nil.
New regime (default)
- Gross salary ₹8,64,000 − standard deduction ₹75,000 = ₹7,89,000
- Less employer NPS under 80CCD(2): 14% cap applies, ₹60,000 allowed → ₹7,29,000
- House property interest and 80C/80D are not available
- Tax: ₹20,000 (slab 3–7 lakh) + ₹2,900 (10% of ₹29,000) = ₹22,900, plus 4% cess = ₹23,816
- Rebate under 87A is not available because total income exceeds ₹7,00,000; marginal relief does not help because the excess over ₹7,00,000 (₹29,000) is more than the tax of ₹22,900.
Recommendation: Old regime, saving ₹23,816. She must file Form 10-IEA on or before the due date under section 139(1) to opt out of the default regime; without it the return will be processed under section 115BAC.
3. How should the ₹1,20,000 arrears be handled, and what procedural step is essential?
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Taxability: Salary is taxed on due or receipt basis, whichever is earlier. The arrears relate to FY 2023-24 but were not taxed then, so they are added to salary of FY 2024-25. That pushes the old-regime total income to ₹3,88,500 (₹7,03,500 + ₹1,20,000 − ₹2,00,000 − ₹2,35,000), still below ₹5,00,000, so tax remains nil after the 87A rebate. Under the new regime the same arrears would push income to ₹8,49,000 and tax to about ₹36,296, so the regime choice does not change.
Relief under section 89: She may claim relief for the arrears by spreading. Compute (a) tax on total income including arrears for FY 2024-25, and (b) tax on income excluding arrears for FY 2024-25 plus tax on the FY 2023-24 income recomputed after adding the arrears at that year's rates. The excess of (a) over (b) is the relief. In her case the relief is small because both years fall in low slabs, but the computation must still be made.
Essential step: Form 10E must be filed electronically before filing the return. The Centralised Processing Centre routinely disallows section 89 relief where Form 10E is missing, and rectification later is avoidable work. Keep the employer's arrears certificate and the FY 2023-24 return and computation as evidence.