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Generally, there is a common belief among us that the benefit of tax exemption on house rent can be availed only by those people who work in a company and whose salary package regularly includes House Rent Allowance (HRA). But do you know that the tax law provides relief to every citizen who is living in a rented house?
Yes, even if you are not employed – that is, you are a self-employed professional, freelancer, small or big businessman, or you are employed but your company does not give you an HRA component, you can still claim tax exemption on the rent you pay from your pocket.
The traditional section 80GG of the Income Tax Act and section 134 under the new rules give you this special facility. Just keep in mind that to avail this exemption, you will have to choose the Old Tax Regime. Let us understand in very simple words how its complete rule and calculation works.
It is necessary to fulfill these 4 conditions
If you want to claim tax deduction on your rent under this rule, you will have to fulfill these basic conditions of the tax department:
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No HRA received: You should not have received any form of HRA benefit from your job, salary or business during that financial year.
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True Fare: You must be actually living in a residential property (house, flat or room) and paying regular rent for it.
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Do not own a house in the same city: You should not own any house in your name, in the name of your spouse, in the name of your minor child or in the name of your Hindu Undivided Family (HUF) in the city where you live or carry on your work/business.
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Submitting Form 10BA: On the online portal while or before filing your Income Tax Return (ITR) Form 10BA It is mandatory for you to fill.
What is the difference between normal HRA exemption and Section 80GG?
Both the rules are meant to save tax on rented accommodation, but there is a big difference in the way they work and the limitations:
How is tax exemption calculated?
The Income Tax Department uses three different formulas given below to determine your total annual savings. Out of these three calculations, the amount which is lowest will be allowed as tax exemption:
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A fixed amount which is ₹5,000 per month or ₹60,000 per year.
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25 percent of your total ‘Adjusted Gross Income’.
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The actual rent you pay during the year, less 10 percent of your total income.
If you want to avoid scrutiny then keep these 5 documents with you
To avoid any kind of notice or inquiry from the tax department, you should have the following proofs so that you can show them if needed:
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A valid rent agreement or lease deed with the landlord.
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Rent receipts signed by the landlord.
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Record of payment by bank transfer, net banking, UPI or check instead of cash.
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Landlord’s PAN: If your annual rent is more than ₹ 1 lakh, then it is necessary to provide the PAN card number of the landlord.
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Form 10BA completed online, in which you declare that you meet all the conditions of this exemption.
What mistakes do taxpayers often make?
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Ignoring Form 10BA: The most common mistake is that people claim deduction while filing ITR, but forget to submit Form 10BA online. In such cases, the tax department immediately rejects the claim.
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Claiming full fare: Some people fill the entire annual rent paid by them (like ₹ 1.5 lakh or ₹ 2 lakh) in the form without understanding the rules. Whereas according to the rules, you can get a maximum rebate of ₹ 60,000 only.
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Making large payment in cash: People who pay huge rent in cash to the landlord without any receipt or solid rent agreement quickly come under the radar of the tax department. Always try to pay your rent through digital means only so that you have a solid record.
If you also fall in this category, then this time while filing your ITR, use Section 80GG under the old tax regime wisely and save a part of your hard-earned money from going to tax.
