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Tax Benefits of Paying Rent

 

Tax benefits of paying rent

 

According to the provisions mentioned in the Income Tax Act 1961, both self-employed and salaried employees are allowed a deduction on the expenditure incurred towards payment of rent for a house occupied by them.

For Self-Employed Individuals:

Under section 80GG of the Income Tax Act, there are provisions that an individual to take benefit of the rent paid by him should fulfill the following conditions:

  • He/she actually pays the rent for his residential accommodation irrespective of the fact that it is furnished or unfurnished.
  • He/she can be a self-employed person or a salaried person. But, in any case, should not have a rent-free accommodation. The employee should not be in receipt of house rent allowance (HRA).
  • He/she or his/her spouse or minor child or HUF of which he/she is a member, does not own any residential accommodation at the place where he ordinarily resides or at the place where he works or carries on his business or profession.
  • If he/she has a property at the place other than those mentioned above, then such property should not be assessed as self-occupied house property in his/her income-tax return.
  • He/she should file a declaration in Form 10BA along with the return of income, to claim deduction.

Deductions under the Act:

It is to be noted that deduction under Section 80GG is limited to the least of the following:

  • Excess of rent actually paid over 10% of adjusted total income
  • 25% of the 'adjusted total income'
  • Rs 2000 per month (this will be Rs 2000 per month for five months only for you)

The Income Tax Department may prescribe other conditions or limitations, with regard to the area or place in which the accommodation is situated and after taking into account other relevant considerations.

For Salaried Employees:

Most of the salaried employees are in receipt of house rent allowance (HRA) and accordingly the deduction on account of rent paid is governed by the provisions related to HRA under the Income Tax Act 1961.

What is Housing Rent Allowance?

House Rent Allowance is an allowance given by an employer to an employee. The sole purpose of this is to meet the cost of renting a home. So, if you are a salaried employee and live in a rented accommodation, you can claim House Rent Allowance (HRA) from your employer, provided such rent is more than 10% of your salary. By claiming HRA, you are eligible for an Income Tax exemption under Section 10(13A) of the Income Tax Act, 1961.

How do you calculate this exemption amount?

Given below is a simple method to calculate the exemption amount. Find the minimum of the following three options:

  1. Actual house rent allowance received from your employer
  2. Actual house rent paid by you minus 10% of your basic salary
  3. 50% of your basic salary if you live in a metro or 40% of your basic salary if you live in a non-metro

This minimum figure is the allowed income tax exemption on house rent allowance. It's prudent to work this out so that you can structure the other components of your variable pay better.

Documentation

The documents required to be submitted for claiming a tax deduction on HRA are the copy of rent agreement between the owner and the tenant and rent receipts. You will need to keep all your rent receipts since it is the only proof that you are paying rent. HRA exemptions are only available on submission of rent receipts or the rent agreement. However, if the HRA is up to Rs 3,000 per month, then receipts/ agreement are not mandatory. It is only when your HRA exceeds this amount that you will have to keep the receipts.

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