The Income Tax Act provides for certain exemptions and/or deductions from taxable income in relation to rent paid by individuals. While salaried individuals receiving House Rent Allowance (HRA) from their employers can claim exemption under Section 10 (13A) of the Act, individuals who do not receive HRA can claim deduction under Section 80GG of the Act.

HRA

Section 10(13A) provides exemption with respect to HRA paid by the employer to the employee. The exemption is not available if the residential accommodation occupied by the individual is owned by the individual or if he/she has not actually incurred rental expenditure.

As per Rule 2 of the Income Tax Rules, the amount of exemption is the least of (i) HRA actually received, (ii) rent paid minus 10 per cent of salary and (iii) 50 per cent of salary if the accommodation is in Mumbai, Kolkata, Delhi and Chennai or 40 per cent of salary in case of other cities. Salary for the purpose of computing the exemption means basic salary and dearness allowance if the terms of employment provide for the same, but excludes all other allowances and perquisites. Example: Hari resides in Chennai and receives a basic salary of ₹8 lakh and an HRA of ₹5 lakh from his employer. Hari pays a rent of ₹3.6 lakh. The HRA exemption for Hari would be calculated as lower of (i) HRA received, i.e. ₹5 lakh, (ii) rent paid minus 10 per cent of salary, i.e. ₹2. 8 lakh (₹3,60,000 – (10% x ₹8,00,000)) and (iii) 50 per cent of salary, i.e. ₹4 lakh. Therefore, Hari would be eligible for an exemption of ₹2.8 lakh, and his taxable HRA would be ₹2.2 lakh (₹5 lakh – ₹2.8 lakh).

Documentation

Where employee submits documentary proof for payment of rent, the employer would consider HRA exemption while deducting tax at source from salary. The proof to be submitted includes rent receipts and duly signed Form No 12BB. If the annual rent exceeds ₹1 lakh, the employee also needs to report the Permanent Account Number (PAN) of the landlord.

As an administrative measure, employees receiving an HRA of up to ₹3,000 per month are exempt from submitting rent receipts for getting exemption at the time of tax deduction by the employer. However, the Assessing Officer may require submission of payment proof at the time of assessment.

Section 80GG deduction

Individuals not receiving HRA from any employer can claim deduction for rental expenditure under Section 80GG of the Act from their gross total income. The deduction is not available if any residential accommodation at the place where the individual ordinarily resides or carries on employment/business/profession is owned by the individual or his/her spouse or minor child or by a Hindu Undivided Family (HUF) of which the individual is a member. The deduction is also not available if the individual owns any residential accommodation which has been treated as self-occupied property in the return of income.

The amount of deduction available is lower of (i) rent paid minus 10 per cent of total income, (ii) ₹5,000 per month or (ii) 25 per cent of total income. Total income for the purpose of computing deduction under Section 80GG refers to total income before considering deduction under this section.

Example: Prasad has a total income of ₹13.5 lakh before considering deduction under Section 80GG, and pays an annual rent of ₹3.6 lakh. The deduction available would be lower of (i) rent paid minus 10 per cent of total income, i.e. ₹2.25 lakh (₹3,60,000 – (₹13,50,000 x 10%)), (ii) ₹60,000 (₹5,000 per month) and (iii) 25 per cent of total income, i.e. ₹3.375 lakh (₹13,50,000 x 25%). Therefore, Prasad will be eligible for a deduction of ₹60,000 in relation to the rental expenditure incurred. Individuals claiming deduction under Section 80GG are required to fill a declaration in Form No 10BA and preserve documents evidencing rent payment for submitting if required by the Assessing Officer.

Individuals paying rent exceeding ₹50,000 per month are required to deduct tax at source at 5 per cent. This requirement was introduced with effect from June 1, 2017. The tax deduction shall be made during the last month of the financial year, i.e., March or the last month of tenancy if the property is vacated during the year.

The deductor (tenant) is not required to obtain Tax Deduction Account Number (TAN). The taxes deducted need to be deposited within 30 days from the end of the month of deduction along with a challan-cum-statement in Form No 26QC. Further, the deductor is required to furnish a certificate of deduction of tax at source in Form No 16C to the payee within 15 days from the due date for furnishing Form No 26QC.

The writer is Tax Partner, People Advisory Services, EY India. Meena Narayanan, senior tax professional, EY, also contributed to the article.

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