How to Save Tax on Your Rent Payments?

Posted on: Dec 24, 2021 | 3 mins | Written by: HDFC ERGO Team

How to Save Tax on Your 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. Taking property insurance for your rented accommodation is an option, but you must know how to save tax on rent paid. Here is where the House Rent Allowance, or HRA comes in. Let us discuss this in detail to get a better understanding.

What is HRA (House Rent Allowance)?

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. A part of the HRA, subject to conditions, is exempted under Section 10 (13A) of the Income Tax Act, 1961.

Is HRA Taxable?

The House Rent Allowance is a part of the income that one receives and thus, is considered a part of the taxable income. Under Section 10 (13A), people living on rent can wholly or partially claim a tax exemption. The HRA is entirely taxable for those who live in their own accommodation and not on rent. There is no exemption in the new tax regime of house rent allowance and thus, those who choose this regime should be aware.

Section 80GG: Tax Benefits for Rent Paid

The next question that arises is how to save tax on rent paid if the individual does not get an HRA from the company or is self-employed. If a salaried individual does not receive the HRA but stays in a rented accommodation, they can claim a deduction under Section 80G of the Income Tax Act. However, it must be noted that there is a limit of Rs. 5000 per month or Rs. 60000 per annum. This benefit cannot be availed if the individual or his wife or a minor child owns a property. Form 10 BA has to be filled by an individual who is claiming a rebate under this section.

HRA 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.

HRA 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.

How to Claim HRA Exemption?

The following conditions have to be met in case one wants to claim HRA exemption:

• One should be staying in a rented accommodation

• Submit valid payment proof of rent paid and rent receipts

• HRA should be a part of the CTC and the salary received

• The calculation of exemption is dependent on factors like rent paid, salary, city of residence and HRA received.

How to Calculate HRA Exemption?

Now you know how to save tax on rent paid but it is also important to know how to calculate the HRA exemption. The lowest of the following will be claimed as an HRA exemption:

• For those living in metro cities, 50% of (basic salary and DA)

• Actual HRA received

• 40% of (the basic salary and DA) for those who stay in a non-metro city

• Actual rent paid less than 10% of (basic salary and DA).

Documents Required to Claim Tax Benefits on Rent Paid

Much like house 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.

When Do You Need a Landlord’s PAN?

There are certain times when the PAN card of the landlord needs to be submitted while claiming the HRA exemption. In case the rent paid is more than Rs. 1 lakh per annum, the PAN has to be compulsorily submitted in order to claim the tax deduction. In case the landlord does not have a PAN card, they will need to sign a self-declaration form stating that he does not have the required PAN card. In case the landlord stays abroad, in this case, the tenant must deduct 30% TDS from the rent paid.

Illustration

Mr. Sharma works with XYZ Pvt ltd and has a basic salary of Rs. 20000. He receives an HRA of Rs. 8000 and pays Rs. 10000 as rent in New Delhi. Under the old tax regime, he is required to pay 20% income tax. To get the HRA benefit, the least of the following amounts will be considered:

• HRA received for 12 months-Rs96,000

• 50% of salary in a metro-Rs. 120,000

• Rent paid minus 10% salary-Rs.120,000-Rs.24000=Rs.96,000

The lowest amount here is Rs.96,000 and thus, the actual HRA will be exempt from tax.

How to Claim a Deduction Under Section 80GG?

To claim a deduction under Section 80GG the following must be kept in mind:

• The taxpayer should opt for the old tax regime

• No HRA has been received in the financial year for which the returns are being filed

• If the taxpayer, the spouse or a minor kid owns any residential property, they cannot claim a deduction under 80GG

• Form 10 BA has to be filed with all details of rent paid

• If the rent paid per annum crosses Rs. 1 lakh the PAN card of the landlord has to be submitted.

FAQs:

1. When can a taxpayer claim tax exemption on HRA?

This exemption can be availed by anyone who has HRA as a part of their salary and stays in a rented accommodation.

2. How to avail of the HRA tax exemption?

The HRA tax exemption can be availed by submitting proof of rent paid and rent receipts by the landlord.

3. Can a self-employed individual claim an HRA exemption?

No, a self-employed individual cannot avail of HRA exemption as this is only for salaried individuals who have an HRA component in their salary.

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. One should know how to save tax on rent paid. If you own a house with or without property 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. You should take house insurance for your contents if you are in a rented accommodation as you cannot insure the premises.

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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