If you are a salaried person, you are most likely receiving a big chunk of your salary as House Rent Allowance (HRA). In order to lower the tax burden, the Income Tax Department allows a taxpayer to claim tax deduction against HRA if he or she is staying on rent (if the taxpayer is staying in his or her own house, the entire HRA is taxable).
However, if you are claiming deduction for HRA, you need to be careful and provide proper proofs. Recently, the Mumbai Income Tax Appellate Tribunal took up a case where a person claimed to have paid rent to her mother, for which she claimed HRA deduction, but could not produce any evidence such as lease/rent agreement, letter to society intimating about the tenancy, bank statement, proof of cash payments, electricity/water bill payments through cheque, etc. Also, her mother didn't disclose such income in her tax return. As there was nothing to prove the tenancy, her claim was rejected. The ruling did not say anything new but reiterated the requirements for proving the genuineness of the HRA claims that the income tax department could verify. The ruling puts the tax department in a stronger position to examine such claims in detail.
"The income tax department is taking cognisance of the fact that the HRA deduction is a major chunk of claims by salaried individuals. This is evident from compliance requirements such as furnishing of the landlord's PAN if the rent is more than Rs 1 lakh per annum and withholding tax if the rent is beyond a certain limit. Hence, taxpayers need to be more careful," says Amit Maheshwari, Partner, Ashok Maheshwary & Associates LLP.
It is easy to claim HRA exemption. One has to just submit rent receipts to the company. But if your claim comes under scrutiny, you will need proper proofs. It is important that you understand HRA deduction rules.
Calculating the Deduction
The HRA depends on four things -- the rent you pay, your salary, the HRA you receive and where you live (metro/non-metro city). The tax deduction is calculated on an annual basis. If you change residence in between, you will have to recalculate the exemption as per the changed rent.
The minimum of the three can be claimed as HRA deduction
- The HRA you receive as a part of salary
- The rent paid
- 40 per cent of your basic salary if you stay in a non- metro city and 50 per cent of your basic salary if you stay in a metro city.
- Rent receipts - There is no rule stating how many receipts will be required. It depends on the employer, who can ask for quarterly as well as monthly receipts, as it is its responsibility to check the documents on the basis of which it is deducting tax.
- Rent agreement- It is the document that establishes the relationship between the tenant and the landlord and the terms of the tenancy. It will be useful in case of any dispute.
- PAN of the landlord if the rent is over Rs 8,333 per month.
In order to check the authenticity of big claims, the Income Tax Department has directed that from June 2017 onwards those who pay rent of more than Rs 50,000 per month will have to deduct TDS (tax deducted at source) of 5 per cent and pay it to the tax department. The provision will be applicable from financial year 2017/18.
"This has been introduced to check evasion in cases where salaried individuals claim HRA exemption against bogus rent receipts. Though the requirement for furnishing PAN of the landlord was already there if the rent exceeded Rs 1 lakh per year, it was not proving an effective trail, as employers were not checking the authenticity of PANs," says Maheshwari.
In order to reduce the compliance burden, the CBDT, in its notification, has provided that the deductor is not required to obtain Tax Deduction Account Number and is liable to deduct tax only once a year. The tax should be deducted at the time of credit or payment (whichever is earlier) of rent for the last month of the tax year or the last month of the tenancy if the property is vacated during the year.
Additionally, in cases where the tax is required to be deducted at a higher rate in the absence of the payee's PAN, such deduction cannot exceed the rent payable for the last month of the tax year or the last month of the tenancy, as the case may be.
The onus of deducting and depositing the tax is on the tenant. The tax has to be deposited within 30 days of the end of the month in which it is deducted. The money has to be deposited electronically with the Reserve Bank of India, State Bank of India or any other authorised bank in challan-cum-statement form 26QC. Also, the tenant will have to provide a TDS certificate (Form 16C) to the house owner within 15 days of the due date for furnishing form 26QC.
In case HRA is not part of salary: A self-employed person or a salaried person who doesn't get HRA but pays rent can also claim HRA deduction under Section 80(GG) of Income Tax Act.
In this case the minimum of three can be claimed as deduction.
- Rent paid minus 10 per cent of total income
- Rs 5,000 per month
- 25 per cent of total income
Total income here is income after all deductions and excludes long-term and short-term capital gains.
To claim this deduction, the assessee has to fill a separate form no 10BA declaring that he or she is staying on rent in this particular property and neither his nor her spouse or children own any property.
Claiming Home Loan Interest and HRA Deduction
If you are living in own house, you can't claim HRA deduction, as you are not paying any rent. But if you have bought the house by taking a loan, you can claim a deduction of up to Rs 2 lakh on interest paid on the loan. However, even if you own a house but are living in a different city and paying rent, you can claim both HRA and home loan interest deductions.
Paying Rent to Parents: You can pay rent to any of your parents and claim HRA deduction. Your parents will have to show the rent received as income from house property. "To claim HRA deduction on this rent, the taxpayer has to enter into a rent agreement with the relative. And the relative who is receiving the rent should show it as part of his or her income," says Archit Gupta, Founder & CEO ClearTax.
House leased on company's name: If you are staying in a house leased by your company, to which you are paying rent, you are not eligible for the HRA deduction. "Since the lease is in the name of the company, it will be treated as rented accommodation provided by the company to the employee. As per the provisions of the Income Tax Act, 1961, the rented accommodation, when provided by the company, will be added to the income of the employee as a perquisite and any recovery made from the employee will be deducted from such perquisite value. Hence, it can't be treated as HRA," says Maheshwari.
Paying rent to spouse: The income tax law doesn't address this issue directly. But the nature of the relationship is such that this attracts higher scrutiny from the tax department. However, one or two judgements by appellate tribunals in the past have allowed the person to pay rent to the spouse and claim tax deduction. But experts say this can always be challenged in higher courts.
Can both husband and wife claim HRA deduction?
If both are sharing the rent burden, then yes. "The amount of HRA to be claimed will be in proportion to the part of the rent they pay. But both should have their names in the rent agreement," says Gupta of ClearTax.
For higher tax savings, the spouse who falls in the higher tax bracket should claim a higher deduction.