De-Tax. Get a tax break for house rent

If you pay rent for your residential accommodation, it makes sense to have house rent allowance (HRA) as part of your salary package. That’s because the HRA amount you get from your employer is exempt from tax — fully or partially — under Section 10(13A) of the Income Tax Act. But as in all things tax, there are some conditions and restrictions.

HRA tax break

To claim the HRA tax exemption, you must live in a rented residential accommodation and pay rent for the same. If you stay in your own house, or in a house where you don’t pay the rent, you cannot claim the exemption. Also, if you pay house rent to your spouse, it does not qualify for exemption. But you can claim exemption on rent paid to others including parents, brethren and in-laws.

If you rent a house for only a part of the year, the HRA exemption is allowed only for that period.

Also, you must actually pay the rent to claim the exemption. If rent is due but unpaid, the benefit of tax exemption on HRA is not available. Employers usually require proof of rent payment (rental agreements and/or receipts from the landlord) before adjusting the HRA tax exemption in the monthly tax calculation.

The exemption is limited to the lower of the following: a) HRA amount received b) rent paid in excess of 10 per cent of salary c) 50 per cent of salary if you live in Mumbai/Delhi/Kolkata/Chennai or 40 per cent of salary if you reside in other cities. Salary here means the sum of basic pay and dearness allowance.

So, if the rent paid by you does not exceed 10 per cent of your salary (basic pay + dearness allowance), you get no tax exemption on the HRA received.

Also, salary is calculated on ‘due’ basis — if you receive salary arrears of earlier years or advance salary pertaining to future years, it will not be considered while calculating the tax exemption.

Not getting HRA?

What if you don’t get HRA but still pay rent? This could be the case with self-employed professionals, businessmen or even some salaried folk whose salaries do not include the HRA component. The Income Tax Act provides relief to this category of rent-payers, too, under Section 80GG.

To claim this tax benefit, you must pay rent for the house you live in and not get HRA for even a part of the year. Also, you must not own a house in the place in which you live, or work, or carry out business. Your spouse or minor child or Hindu Undivided Family (if you are part of one) should also not own a house in that place.

There is one more condition. Say, you own a house at another place, which you declare as self-occupied. If you use it for your own residence, you don’t get the deduction.

In short, to claim the deduction, you should not own and occupy a house anywhere, and your spouse or minor child should also not own a house in your place of stay. Also, you must file a declaration in Form No. 10BA.

You can claim tax deduction restricted to the least of the following: ₹5,000 a month, rent paid in excess of 10 per cent of your total income, or 25 per cent of your total income.

Here, total income means your taxable income from all sources (salary, capital gains, house property, business or profession, and other income) and considering all deductions except those under Section 80GG.

In essence, the maximum deduction you can claim on rent paid if you do not receive HRA is ₹5,000 a month, irrespective of how much you shell out as rent.

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