An income tax exemption which most of the people avail is on House Rent Allowance (HRA). Such allowance is paid by the employer to an employee for his duties. These are generally taxable unless a specific exemption is provided for it. If an employee pays rent for his accommodation, he can avail income tax benefits on the HRA part of his salary along with availing benefits on a home loan.
All the he requires is proof of rent paid through signed and stamped receipts, together with other documents like the address of rented residence, name and details of the owner of the house, period of rent etc. to qualify for such deduction.
Definition of House Rent Allowance as per Sec.10 (13A) of the Income Tax Act, 1961:
House Rent Allowance means any special allowance provided to an employee by his employer towards the expenses he actually incurs for the payment of rent for the residential accommodation occupied by him to such extent as may be provided taking into account the area in which such accommodation is located and other relevant factors.
How can one claim such deduction?
If one gets a basic salary of Rs 20,000/- per month and rents a flat in a metropolitan city for Rs 5,000/- per month, his actual HRA will be Rs. 8,000. He is entitled to 50% of the basic pay for HRA exemption.
Quantum of deduction provided:
House Rent Allowance is given by the employer to his employee towards his expenses incurred in connection with rent of his accommodation.
HRA of an employee is exempt as per section 10(13A) of the Income Tax Act to the extent of the minimum of the following three amounts:
1. Actual House Rent Allowance received by him;
2. Excess of rent paid for the house he occupies over 10 % of his salary;
3. 50% of salary where the residential house is situated in a metropolitan city and 40% of the salary where the house is situated elsewhere.
Conditions for availing the deduction:
1. To claim the said exemption, one should actually pay the rent for the rented premises which he occupies;
2. The assessee should not be the owner of the rented premises. As long as he is not the owner of the rented house, the exemption of HRA can be availed by him.
3. The deduction can be availed only for the period during which the rented house is occupied by the person claiming the deduction and not after that period.
Meaning of “salary “for the purpose of section 10(13A):
For the purpose of this deduction under section 10(13A) of the Income Tax Act, salary refers to the basic salary and also includes dearness allowance, if paid to the employee as well as any commission, if any, received by the employee.
When an assesee cannot avail the deduction?
An assessee cannot avail the deduction on HRA in the following cases:
a) When he resides in his own house;
b) When he does not pay any sum towards rent;
c) When the rent he pays is less than 10% of his salary.
Deductions for rent paid under Section 80GG:
One can also claim deduction for the rent paid by him even if he does not receive HRA. Many people are not aware of this deduction.
Section 80GG of the Income tax Act provides people a deduction towards the house rent paid by him for his own residence. However it is allowed subject to the following conditions:
1. The Individual does not receive any HRA from his employer which qualifies for exemption under section 10(13A);
2. He files the declaration that he is paying the rent. This has to be done by filing from 10BA;
3. He does not own:
(i) any residential accommodation in his own name or in the name of his spouse or minor child; or
(ii) At any other place, a house the value of which should be calculated as per Section 23(2)(a) or Section 23(4)(a) of the Act.
Amount of deduction:
The individual can get a deduction for the house rent paid by him in excess of 10% of his income, or Rs. 2,000/- per month, whichever is less. The total income for the purpose of this section will be calculated before making any deduction as per section 80GG.