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Have to Rent? Here’s How to Save Tax on Your Rent Payments.

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Saving Tax on Rent Payments

A number of expenditures that you make in order to fund and facilitate your life, health and security come with equal opportunities to get tax returns on the tax that you pay for these facilities. From health insurance to life insurance and home insurance, even your petrol bills can be counted for tax returns, as these expenditures are considered more or less necessary in order to maintain your lifestyle. Rent payments are one such expenditure that can save you tax as well.

In today’s world, as property prices skyrocket, buying a house has become a plan for the exponentially longer term, as the cost of houses could amount to multiple years’ worth of salary for an individual. Naturally, renting becomes the next best option. If you are living in a different city for work, for example, you could have to rent a place to live as well. Here is where the House Rent Allowance, or HRA comes in.

What is House Rent Allowance (HRA)?

If you are employed at a company, the salary you receive is separated into a number of bands, with HRA being one of them. According to this band, your employer pays you a certain amount as part of your salary in order to compensate for your rent payments. Since this payment, though provided by the company, is necessary, it is viable for claiming tax rebates.

How it Works

1. For Salaried Individuals

If you are a salaried individual, your HRA tax claims are made under Section 10-13A of the IT act. Under this section, the deduction is considered based on the lowest among the following.

The HRA provided by the company as part of the salary

● 50% of an employee's salary if they are living in a metro city.

● 40% of an employee’s salary if they are living in a non-metro city.

● Rent paid by the employee each month.

The lowest of these aside, all other income is taxable as per usual.

2. For Self Employed Individuals

If you are self-employed, you can claim tax benefits under section 80GG of the income tax instead, with the least among the following being considered exempt.

● Rupees 5,000 monthly.

● 25% of an individual's income (this refers to one’s adjusted income which accounts for long term capital gains and short term capital gains)

● If the rent paid is less than 10% of the individual’s adjusted income.

An Example of How Deductions Work

If you are a salaried Individual earning a monthly income of 30,000, of which 15,000 is the HRA you receive. Your annual deductions will be the least of :

The HRA Received (15,000 * 12) : Rs 180,000

Rent Paid (10% of the salary subtracted from (10,000 *12), multiplied by 10%) : Rs 84,000

50% of Basic Salary (30,000 *12)/2) : Rs 180,000

40% of Basic Salary (rural areas) (30,000*12) * 40%) : Rs 144000

Therefore, according to the previous slab, you would claim deductibles to the tune of 84,000 regardless of whether you lived in a metro city or not.

Documents Required

Much like Home insurance or a home loan, you require certain documents to claim tax returns on your rent payments. These include:

● The rent receipts of all rent payments made

● PAN Card

● Address of the rented property

● Revenue stamp

● Landlord’s signature

● Rent Agreement.

Terms and Conditions

1. You can only claim deductibles on your HRA if you are living in a rented apartment.

2. You do not own any property (with or without home insurance) in the vicinity of the rented property.

3. You can only claim benefits under section 80GG if you do not receive any from Section 10-13A.

4. Only the HUF and individuals can avail of these benefits.

5. If you are a salaried individual, it is worth noting that while companies provide HRA funds, it is not necessary and they are not bound by law to do so.

6. From FY 2020-21, individuals now have the opportunity to pay their income tax under an optional new regime, for which the terms and conditions may vary.

Conclusion

Renting can be unavoidable for many and even be a preferable means of securing a home.. Renting becomes an unavoidable necessity (though it comes with many benefits). The IT Act provides relief through returns from Section 80GG and Section 10-13A. If you own a house with or without house insurance in the same city, however, you cannot claim HRA. If you are looking for house insurance, the HDFC ERGO website has a number of offerings you can browse and consider.

Disclaimer: The above information is for illustrative purpose only. For more details, please refer to policy wordings and prospectus before concluding the sales.

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