To meet the high costs of living in rented accommodations, employers pay house rent allowance (HRA) to their employees. India’s income tax laws also provide benefits to people who do not own a house and live on rent, without receiving HRA. However, the tax benefit differs, in each case. In this article, we discuss the income tax rebates that people in India enjoy in various instances.
Tax benefits available to salaried people who receive HRA from their employers
You are entitled to tax exemption under Section 10 (13A) of the Income Tax Act, with respect to the HRA received by you, subject to certain limits and conditions. The first condition, is that you should actually be paying rent for a residential accommodation occupied by you. This means that the accommodation should be in a place where you are employed. Moreover, you should not be the owner (sole owner or co-owner) of the accommodation for which you are paying rent.
This situation may arise, when the tax payer pays rent to the joint owner of the property, or if the property owned by the tax payer is leased to the employer under an arrangement where the employer gives the same back to the employee on rent.
The quantum of deduction, will depend on where the employee is staying. The exempt amount of the HRA would be lowest of the following:
- HRA actually received.
- 50% of the salary (for employees staying in metropolitan cities of Mumbai, Kolkata, Delhi or Chennai), or 40% of the salary (for employees living elsewhere).
- Excess of the rent paid over 10% of the salary.
Salary for the above purpose includes the basic salary, dearness allowance and any fixed commission as percentage of turnover. All other allowances shall be excluded. For the purpose of computing the exemption, the salary shall only be considered for the period for which you have paid the rent. Consequently, no HRA tax benefit shall be available, if the rent paid by you does not exceed 10% of the salary for the relevant period.
Do note here that under the existing laws, no income tax in the form of HRA is available to people working from home. Expenses incurred in order to make your home equipped with facilities that enable a smoother work-from-home environment. are also not eligible for deductions from your salary.
Rent paid by people who are not in receipt of HRA
Section 80GG of the Income Tax Act also allows deduction on the rent paid by a person. This can be claimed by self-employed people, as well as employees who do not receive any HRA from their employers. The benefit is allowed as a deduction from one’s total income. However, the deduction is restricted to 25% of the total income, or excess of rent actually paid over 10% of the total income. Moreover, the maximum deduction that can be claimed in a year is Rs 60,000 and Rs 5,000 per month.
This 10% deduction is not based on the period for which you occupy the rented premises. Hence, you can claim the full deduction, even if you have occupied the rented premises for one month. However, this benefit cannot be claimed, if you, your spouse, or minor child also own any residential accommodation in the same region. It also cannot be claimed, if the HUF of which you are a member, owns residential property at the same place where you reside. So, even if the property owned by the specified persons above is let-out, you still cannot claim the benefits for rent paid under section 80GG. You also cannot claim this deduction, if you own a house property at any other place, which is not let-out and claimed as self-occupied.
(The author is a tax and investment expert, with 35 years’ experience)