You Get Tax Relief Even If You Are Staying on Rent

Most of us are quite clear about the tax incentives associated with home loans. You get tax benefits up to Rs 1.5 lacs for principal repayment under Section 80C of the Income Tax Act. Additionally, you get deduction of up to Rs 2 lacs per financial year for interest payment on home loans.



Must Read: Tax Benefits on Home Loans

However, real estate prices have shot through the roof over the last decade. With this sharp increase in real estate prices, not everyone can afford a house. A number of us have to resort to staying on rent. Does the Government provide any tax relief to those staying on rent? Yes, it does. In this post, I will discuss such benefits.

1. House Rent Allowance (HRA)

If you have been an employee, you will most likely be aware of this term. House Rent Allowance (HRA) is paid as part of your salary. Entire HRA is not exempt from tax. HRA tax exemption is covered under Section 10(13A) and Rule 2A of the Income Tax Act. The amount of HRA that is exempt depends on your basic salary (including dearness allowance), rent you are paying and the city you stay in.

The exempt HRA is the lowest of the following:

  1. House Rent Allowance
  2. Rent – 10% of Basic Salary
  3. 40% of Basic Salary. If you are residing in a metro city (Delhi, Mumbai, Chennai and Kolkata), the limit is 50% of Basic Salary

Illustration

Ramesh works in a multinational firm. His basic salary is Rs 60,000 per month.  He receives Rs 45,000 per month as HRA. He stays in a rented accommodation and pays rent of Rs 40,000 per month. Let’s try to calculate his exempt HRA under two scenarios.

Scenario 1: He stays in one of the metro cities

Rented Accommodation in Metro CityAmount
ABasic Salary (Per Month)60,000
BActual Rent Paid (per month)40,000
C10%  of Basic (10%*A)6,000
DRent -10% of Basic  (B-C)34,000
EHouse Rent Allowance (per month)45,000
F50% of Basic  (50%*A)30,000
GExempt HRA  per month Min (D,E,F)30,000
HTotal Exempt HRA (per Annum)360,000
ITaxable HRA (per Annum)180,000

Scenario 2: He stays in a non-metro city

Rented Accommodation in Non-Metro CityAmount
ABasic Salary (Per Month)60,000
BActual Rent Paid (per month)40,000
C10%  of Basic (10%*A)6,000
DRent -10% of Basic  (B-C)34,000
EHouse Rent Allowance (per month)45,000
F40% of Basic  (40%*A)24,000
GExempt HRA  per month Min (D,E,F)24,000
HTotal Exempt HRA (per Annum)288,000
ITaxable HRA (per Annum)252,000

You can see exempt HRA depends on the city you are staying in. Hence, if Ramesh falls in 30% tax bracket and stays in Mumbai, he will save income tax worth (30% of Rs 360,000) = Rs 1.2 lacs (excluding cess). This is a significant amount.

Points to Note

  • You must receive HRA as part of your salary i.e., HRA must be part of your salary structure (should reflect in your Form 16) before you avail this tax benefit.
  • You can avail HRA exemption only if you are staying on rent. You cannot claim this benefit if you are staying in own house.
  • The amount of HRA that is not exempt is added to your total income and taxed as per your income tax slab.
  • Some companies ask you to structure your salary at the start of financial year. You can keep this HRA calculation in mind and structure your salary accordingly to derive the maximum tax benefit.
  • HRA exemption is on monthly basis. If your salary remains constant during the financial year, then this aspect will not impact anything. You can simply multiply exempt HRA by 12 to arrive at annual exemption. However, if there is change in salary or rent mid-year, you need to calculate exempt HRA per month and  add up all the monthly HRAs to arrive at annual HRA exemption.

I stay in my parent’s house. Can I claim HRA?

Yes, you can do that. You must pay rent to your parents if you want to claim HRA benefit. Your parents must show this rental income while filing their income tax returns.

I stay in a house owned by my spouse. Can I pay rent to my spouse and claim HRA?

Though nothing in the Income Tax laws prevents that, do avoid this situation. Won’t be taken kindly by the Income Tax Authorities.

My spouse and I share the rent.  Can both of us claim HRA benefit?

Yes, you can do that to the extent of rent you are paying. So, if the total rent is Rs 40,000, you can pay Rs 24,000 and your spouse can pay Rs 16,000 per month (or any other ratio).  You can calculate your exempt HRA income on basis of rent of Rs 24,000 while your spouse can calculate on the basis of rent of Rs 16,000 per month.

Will be better if the two of you can transfer your share to landlord’s bank account separately i.e. you transfer Rs 24,000 per month and your wife transfers Rs 16,000 per month.

If possible, get two receipts from the landlord.

If that’s not possible, maintain a clean record of bank transactions to demonstrate that both of you contributed to the rent. So, your spouse can transfer Rs 16,000 to your bank account every month and you can transfer Rs 40,000 to landlord’s bank account.

This will save you hassles even if your case comes up for scrutiny.

I have purchased a house through home loan but stay on rent.

In such a case, you can claim tax benefit under Section 24 (for interest payment) and Section 80C (for principal repayment). Additionally, you can also avail HRA tax benefit if you are staying on rent. For more on this topic, do refer to the post on Tax Benefits of Home Loans.

2. Section 80GG

Provisions of Section 80GG come to aid in cases you are self-employed or your employer does not pay HRA as part of your salary.

My employer does not pay me HRA. Or I am Self-Employed.  What should I do?

There are cases, especially in smaller corporate setups, where HRA is not paid as part of salary. Moreover, there is no question of receiving HRA if you are self-employed. Are there any tax benefits for such taxpayers?

For such taxpayers, there is limited relief under Section 80GG of the Income Tax Act. In such cases, you can avail tax deduction to the extent of the following:

Minimum of

  1. Rs 2,000 per month (Rs 24,000 per annum)
  2. 25% of total income
  3. Rent – 10% of total Income

You can see the maximum deduction (tax benefit) you can claim (if you are not receiving HRA) is Rs 24,000 per annum. Far cry from the savings if you are receiving HRA but some savings nonetheless. In the Income Tax Act, there is no tax relief unless you meet certain conditions. To avail benefit under Section 80GG, you must meet the following conditions:

  • You, your spouse or minor children shall not own residential accommodation at the place of your employment/work.
  • You should not have any Self Occupied residential premise in any other place i.e. you must not own a house for purposes of own residence (Section 23 2(a) or 4(a)).
  • You must not have availed any HRA during the entire financial year. If you were employed for 1 month in the financial year (and availed HRA) and were self-employed during the remaining period, you cannot avail tax relief under Section 80GG.

To claim deduction Section 80GG, you must file declaration under Form 10 BA.

Conclusion

There is tax relief even if you are staying on rent.  If you have an option to structure your salary, optimize the salary structure to avail maximum tax benefit. You never know, these tax savings may form part of down payment corpus when you decide to purchase your dream house.