How to save tax on house rent ?

The Income Tax Act, 1961 offers benefits on House Rent in two ways which can be categorised as follows:

1. For Salaried Individuals: To meet the high costs of living in rented accommodations, Employers pay HRA (House Rental Allowance) to their employees.
2. For Self Employed People/who are not in the receipt of HRA: 80GG of the Income Tax Act, 1961 allows deduction on the rent paid by a person.

 

A. HOW TO CLAIM HRA ?

One can claim benefit of HRA under Section 10(13A) of the Income Tax Act, 1961 only when he is a salaried person who receives HRA from his employer. HRA is exempt from income tax, subject to certain conditions which are as follows:

  

1. The first and foremost condition is that the person claiming HRA must be actually paying rent for the residential accommodation occupied by the person.
2. The person claimimg HRA must not be the owner/co-owner of the accommodation for which he is paying rent.

 

Rules for claiming exemption of HRA

Exemption shall be least of the following:

1. Actual HRA Received
2. 50% of salary received (Basic salary+ DA (Dearness Allowance) for those living in metro cities (Mumbai, Kolkata, Delhi, Chennai), and for non metro cities it is 40%.
3. Excess of rent paid annually over 10% of annual salary.

 

: In case of dearness allowance (if it forms part of retirement benefits) and commission received on the basis of sales turnover is applicable, these two are also included in the component of basic salary for the purpose of calculation of HRA Exemption.

Just to give you all a glimpse of HRA Calculation, here comes an example with proper calculation
Mr. X, an individual with a monthly basic salary of Rs. 15000, receives HRA of Rs. 7000 and pays Rs. 8400 rent for accommodation in a metro city. The tax rate applicable to Mr. X is 20% of his income.

1. Actual HRA Received= Rs. 84000(7000*12 months)
2. 50% of salary= Rs. 90000(50% of 180000(15000*12))
3. Excess of rent paid over 10% of annual salary= Rs. 82800(100800(8400*12)- 10% of 180000)

Therefore, least comes out to be Rs. 82800. So, out of actual HRA received of Rs. 84000, 82800 gets tax exemption and the rest amount of Rs. 1200 gets add to the total taxable income of Mr. X, on which  tax of Rs. 240(@ 20%) gets payable.

 

Note: HRA exemptions can be availed only on submission of rent receipts or the rent agreement with the house owner. 
Note: It is mandatory for the employee to report the Pan Card of the 'landlord' to the employer if the rent paid is more than Rs 100000 annually. 
 

A. HOW TO CLAIM 80GG ?
A self-employed individual/ person not claiming HRA can claim deduction under section 80GG for the deduction of rent paid.

Least of the following amount will be considered as deduction:

1. Rent paid in excess of 10% of Adjusted Total Income
2. 25% of Adjusted Total Income
3. Rs. 5000 per month

Adjusted Total Income means:

Total Income= XXXX

(-) Long Term Capital Gain= XXXX

(-) Short Term Capital Gain u/s 111A=XXXX

(-) Income u/s 115A or 115D=XXXX

(-) Deductions (80C to 80U except 80GG) =XXXX

Balance amount available= Adjusted Total Income

 

Note: While claiming a tax deduction, one must remember that the individual himself or his/her spouse, or minor child, or as a member of the Hindu Undivided Family (HUF) must not own any accommodation. Also, if the individual owns any residential property at any place and earns rent from it then no deduction is allowed.