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Those working in the unorganised sector often may not get house rent allowance as part of their salary package. This may make them wonder about two things. First, since the HRA is not part of their salary package, will they be able to enjoy deductions that are offered to tenants under the Indian’s income tax laws? Second, if it is so, how do they go about it? In this article, we answer these two important questions for those tenants who, in spite of paying a significant amount of their salary as rent, are not able to claim tax deductions right now.
The answer to the first query is that you can claim income tax deductions against the rent you pay, even if HRA is not part of your salary package. While salaried individuals can claim deductions under Section 10 (13A) if HRA is part of their salary package, individuals whose salary does not include HRA can claim tax rebate under Section 80GG of the law. In this article, we will discuss in details how to claim tax benefit under Section 10 (13A) and Section 80GG of the Income Tax Act.
How to claim tax deduction if HRA is part of your salary package?
Provisions of Section 80GG of the income tax law would be applicable if HRA is not part of your salary. However, there are certain other terms and conditions that a taxpayer has to meet to avail of benefits under Section 80GG.
What conditions do you have to fulfill to claim rebate under Section 80GG?
Under Section 80GG, deductions on income tax are offered to individuals against rent on fulfilling certain terms and conditions.
- Self-employed, salaried individuals and Hindu Undivided Families (HUFs) can claim deductions under this Section. Companies are not allowed to claim deduction under Section 80GG.
- HRA should not be part of their salary package.
- The individual, his spouse or his minor child should not own a property in the city where they are occupying the rented accommodation for which they are going to claim deductions. Their rented home should also not be used to carry out any business/work activity.
- The taxpayer will also not be able to claim the deduction under Section 80GG if he owns a self-occupied property in another city.
- The section excludes owners of a property the value of which is determined under Section 23 (2) (a) and Section 23 (2) (b) of the tax law. As both these sections deal with self-occupied property, the taxpayer can claim the deduction if the property is let-out or deemed to let be out property. The rebate, however, will not be applicable if you are enjoying tax deductions on home loan under Section 24.
How to calculate tax deduction under Section 80GG?
The taxpayer can claim the least of the three below-mentioned components:
*25% of the total income, excluding long and short-term capital gains
* Actual rent paid minus 10% of total income
* Rs 60,000 a year (Rs 5,000 per month)
Note: Before 2016-17, this limit was Rs 24,000 a year.
To arrive at these percentages, long-and-short-term capital gains, deductions under Section 80C to 80U and income of foreign company are first deducted from a tax payer’s gross income.
Example 1
Reena Mehra earns Rs 50,000 per month and pays Rs 15,000 as monthly rent. In her case, the deduction will be the least of the three amounts:
25% of her total income: Rs 12,500
Actual rent minus 10% of income: Rs 15,000- Rs 5,000 =Rs 10,000
Standard limit: Rs 5,000
Deduction Mehra can claim: Rs 60,000 a year
Since, the minimum amount in her case is Rs 5,000 per month, Mehra can claim Rs 60,000 annually as tax deductions against her overall rent expenditure of Rs 1.80 lakh.
What information you need to fill to claim HRA?
To claim benefits under Section 80GG, a taxpayer has to fill Form 10BA.
| Details you have to fill in Form 10BA 1. Name of the tenant 2. Address of the tenant 3. PAN number of the tenant 4. Monthly rent 5. Mode of payment 6. Name of the landlord 7. Address of the landlord 8. Landlord’s PAN number (if rent is higher than Rs 1 lakh/year) |
Check out Form 10BA format here.
Note here that you will have to provide rent receipts from the period for which you have paid the rent, if you pay a monthly rent exceeding Rs 3,000. However, providing the receipts on a monthly basis is not mandatory. The rent receipt could be in quarterly, half-yearly or annual form. Also, affixing a revenue stamp on each rent receipt is necessary, if the cash payment is more than Rs 5,000 per receipt. In case the payment has been made through a cheque, the revenue stamp is not required.
Why deduction limit under Section 80GG is low?
When compared to tax benefits offered under Section 10 (13A), the limit under Section 80GG is quite low. In majority of cases, taxpayers are not able to claim more than Rs 60,000 as deduction in a year under this section because average rents have grown exponentially across cities in India, including Tier-II and Tier-III cities. Data available with Housing.com show average monthly rent in some of the fast-growing small cities is as high as Rs 15,000/month.
Unlike Section 10 (13A), where changes could be implemented by way of notifications, an amendment in the tax law would be required to increase the deduction limit under Section 80GG. This limitation has kept the rebate under this section much lower than the average spent by tenants in India.
How to maximise benefit under Section 80GG?
Taxpayers living with their parents can claim deductions under Section 80GG if they sign a formal rent agreement that shows Rs 60,000 as their annual rent expenditure. This rental income, however, will be taxed in the hand of your parents. The advantage could be higher in case you parents are retired senior citizens. Do note here that you will note able to claim the HRA in case you are the co-owner along with either of your parents.
How to claim tax deduction if HRA is part of your salary package?
Only companies operating at a small-scale don’t offer HRA as part of the employees’ salary component; the same is not true in case of medium and large scale enterprises. Now, let us find out how to claim tax deductions if HRA is part of your salary. Deduction in income tax against the rent paid in such cases is offered under Section 10 (13A). Under this section, much higher deductions could be claimed by the assesse as no upper limit has been set under the law.
What conditions do you have to fulfill to claim rebate under Section 10 (13A)?
*Only salaried individuals can claim deductions under this section.
*HRA should be the part of your salary package.
*The deduction is available only for the period during which the accommodation is occupied by the taxpayer. To claim the benefit, the tenant will have to provide actual rent payment, too
How to calculate tax deduction under Section 10 (13A)?
The taxpayer can claim the least of the three below-mentioned components:
*50% of your basic salary# if you live in Delhi, Mumbai, Kolkata and Chennai or 40% of your basic salary if you live in any other city except the four cities mentioned above
*Rent minus 10% of the basic salary
*The actual HRA
#Basic salary means includes basis salary along with dearness allowance.
Example 2
Delhi-based Kajal Tiwari’s basic salary is Rs 50,000 per month and she receives Rs 18,000 as HRA. For her rented accommodation, she pays Rs 15,000 as monthly rent. In her case, the deduction will be the least of the three amounts:
50% of her basic salary: Rs 25,000
Actual HRA: Rs 18,000
Actual rent minus 10% of the basic salary: Rs 10,000
Annual deduction: Rs 1.20 lakh
Example 3
Lucknow-based Stuti Kashyap earns Rs 20,000 as her basic salary. While her HRA is Rs 7,000, she pays Rs 6,000 for her rented accommodation.
In her case, the deduction will be the least of the three amounts:
40% of her basic salary: Rs 8,000
Actual HRA: Rs 7,000
Actual rent minus 10% of the basic salary: Rs 4,000
Annual deduction: Rs 48,000
What information you need to fill to claim HRA under Section 10 (13A)?
| Details you have to provide to your employers to claim HRA Address Rent paid Tenure Landlord’s name Landlord’s PAN (if rent is in the excess of Rs 1 lakh a year)) Rent receipts Copy of rent agreement |
How to maximise benefit under Section 10 (13A)?
As is true of Section 80GG, taxpayers can also claim deduction if they live with their parents and pay them rent and can produce rent receipts proving the same. This arrangement, however, does not work in case of spouses.
Those who own a property in another city or whose property is rented out can simultaneously claim deductions against home loan principal (Section 80C) and interest (Section 24) payment along with HRA.
FAQs on HRA
Can I claim HRA along with home loan tax benefits?
Yes, if you are living in a rented accommodation in the city where you work, you can enjoy tax deductions on home loan for a property you own in another city along with the deduction on your HRA under Section 10 (13A). If you are claiming HRA benefits under section 80GG, however, you can’t claim tax benefits for a property you own in another city.
What happens to HRA in case I live in my own house?
The HRA would be taxed as part of your overall income.
Can I pay rent to my family and claim HRA?
A taxpayer can pay rent to either of his parents and claim this amount as HRA deduction under Section 10 (13A) or Section 80GG. The parent would, however, have to declare this rental income as part of his annual income while filing returns.
How to prove I am paying rent to my parents to claim HRA?
While deductions can be claimed up on producing rent receipts and rent agreement, a taxpayer living in such an arrangement must maintain a banking transaction history to substantiate his claims. There have been several instances in the past where the I-T department has rejected such claims, because those lacked authenticity.
Can I pay rent to my wife/husband and claim HRA?
You can’t claim HRA deduction against rent paid to your spouse.
Do I need my landlord’s PAN to claim HRA deduction?
If you need to submit a copy of your landlord’s PAN Card in case you pay more than Rs 1 lakh as rent.
How to claim HRA if employer does not give HRA?
Rebate could be claimed under Section 80GG of the Income Tax Act if HRA is not part of your salary package.
Can I claim both HRA and home loan tax deductions if I own a property in the same city where I have rented an accommodation?
This could be allowed if the taxpayer has a genuine reason to stay away from his own home. In a city like Mumbai, for instance, where daily commutes could be really long from one part of the city to another, a taxpayer might be able to claim deductions for his rented house, say, in central Mumbai and his own property at, say, Navi Mumbai.
How to calculate HRA taxability?
Under Section 10 (13A), the lowest amount of the following is tax exempt: *Actual HRA received *Rent paid minus 10% of the basic salary *50% of the basic salary if you live in Delhi, Mumbai, Kolkata and Chennai, or 40% of the basic salary if you live in any other city. Under Section 80GG, the lowest amount of the following is tax exempt: *25% of the total income, excluding long and short-term capital gains * Actual rent paid minus 10% of total income * Rs 60,000 a year (Rs 5,000 per month).
Can I claim HRA exemption if I jointly own a property in which I live and pay rent to the co-owner?
The income tax law does not allow that.
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