When splitting works better
While calculating HRA exemption, the employer considers the least of the following amounts:
(1) HRA received
(2) 50% of basic salary if living in metros, otherwise 40% of basic and
(3) rent paid above 10% of basic salary.
An individual can claim the entire HRA as exemption if the rent paid works out to at least 60% of the basic pay in metros, and 50% otherwise. In other cases, the exemption will be less than the actual HRA component of the salary, implying that the tax savings will also be less.
To optimise your HRA exemption, consider splitting it with your spouse. If your spouse is also working and is eligible for HRA, then you save more tax by splitting the HRA claim. Consider a married couple paying a monthly rent of `24,000, with the husband earning a basic pay of `24,000 and the wife `16,000. If the husband stakes claim to the entire rent paid for HRA exemption, he will be able to save `14,400 in taxes for the year. His wife will have to pay tax of `9,600 on unclaimed HRA. However, if the couple were to split the HRA claim 50:50 between themselves, the tax saving would be `21,120 (see chart).
How much you should split
A couple may choose to split the rent in any proportion depending on their salary structure to save more tax. The question is in what proportion should one split the HRA claim? If the couple is not in the same tax slab, the partner in the higher tax slab should ideally claim a larger chunk of the rent paid for exemption. The rent should be split in such a way that the spouse in the higher bracket pays 1.2 times or 120% of HRA received by him as rent and the balance rent is paid by the person in the lower tax bracket. This will help maximise the HRA exemption for the spouse in the higher tax slab. For the same couple mentioned earlier, if the husband is assumed to be in the 20% tax bracket, a 50:50 split in rent payment would translate into tax savings of `32,640. However, if the husband were to claim rent payment of `14,400, while the balance `9,600 is claimed by the wife, the total tax savings for the couple would be `38,400. Even when both partners are in the same tax slab, but one partner is eligible for higher HRA, it would be more tax-efficient for the latter to claim a higher contribution towards rent.
Practical hurdles
There are, however, some hurdles involved in the plan. To claim the HRA exemption, both partners need to show a rent receipt in their name. This can either be two different receipts with respective amounts or a single receipt for the full amount bearing both names. In the latter case, legally you are free to claim exemption in any proportion. However, some employers may not agree to this arrangement, so you must check with your employer before filing the investment declaration. To be on the safe side, ask the landlord to specify the proportion in which the rent is paid by both in the common receipt. If you want to split HRA claim, it is better to have documentation that specifies sub-division in rent payment. No employer will accept a rent receipt made out only in the name of the spouse. Also, the landlord may only be able to include both names in the rent receipt if the rent agreement mentions both.
A rent receipt may not be enough. It will suffice at the time of claiming HRA exemption from your employer, but if the taxman picks up your income tax return for scrutiny, both partners must be in a position to prove actual payment of the rent amount claimed. This is not a problem where both partners are paying their share separately to the landlord. But in many cases, one of the partners is likely to make the entire rent payment to the landlord. In such a scenario, the spouse can pay hisher share to the other, who can in turn pay the entire sum to the landlord.The only issue is that such a transfer to the spouse should be in the form of cheque or bank transfer, not cash.
1.ICICI Prudential Tax Plan
2.Reliance Tax Saver (ELSS) Fund
3.HDFC TaxSaver
4.DSP BlackRock Tax Saver Fund
5.Religare Tax Plan
6.Franklin India TaxShield
7.Canara Robeco Equity Tax Saver
8.IDFC Tax Advantage (ELSS) Fund
9.Axis Tax Saver Fund
10.BNP Paribas Long Term Equity Fund
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