Individuals who generally live and work in the cities from rented houses are allowed an allowance called the House Rent Allowance or HRA to reduce their taxes. This component is part of the salary structure and maybe the whole or partial amount available as a deduction under the HRA head. The HRA allowance is claimed on rental expenses of accommodation. When you live in your own house and not in rented accommodation, this component of your salary is fully taxable.
What is section 80GG of Income Tax Act?
The Sec 80GG is also called the rent paid deduction in income tax. This was under the old tax regime before the Goods and Services Tax (GST) was implemented. Under the new tax regime, for filing Income Tax Returns or ITR from the AY 2021-2022 or FY 2020-2021, tax exemption on HRA is unavailable.
Mrs Nirmala Sitharaman, our Finance Minister, announced the new tax regime for taxpayers in the Union Budget applicable to this financial year. The new income tax regime brings in many changes, and the biggest one is that many of the tax exemptions or deductions available under the old regime are unavailable in the newer one like HRA.
But what happens under the old tax regime to taxpayers who earn a salary but have no HRA component in the salary? When no HRA is received, and a taxpayer makes a rental payment for unfurnished or furnished accommodation occupied by you on rent, you can claim a tax deduction under U/S Sec 80GG of Income Tax Act 1961.
Conditions to claim 80GG of income tax deduction:
- The taxpayer must be salaried or self-employed.
- You do not receive any HRA in your salary.
- You, your minor child, spouse or Hindu Undivided Family (HUF) of which you are a part, do not own residential accommodation at the place you reside in/ work in/ are self-employed in/ have your business in.
- If you own a self-occupied residential property, no deduction is allowed under section 80GG.
- You must fill in Form 10BA income tax along with proof of rents paid.
Below is a sample of the Form 10BA to be filled to claim a tax deduction on rents paid under Section 80GG of Income Tax Act of 1961.
Also Read: All About Special Allowance - its Taxation & Calculation in India
Deduction allowed:
In calculating the deductions allowed under the head of tax exemptions under Sec 80GG, the lowest of the three conditions is allowed as the tax-exempt limit for rent deduction income tax.
- A deduction of Rs 5,000/- per month.
- An amount of 25% of the aggregate income (excluding short and long-term capital gains U/S 111A, 115D or 115A, the deductions under Sections 80C to 80U and the deductions made under Section 80GG.)
- The actual rent minus 10% of the income calculated.
You can take the Sec 80GG of Income Tax Act benefits for rentals paid if you fulfil the conditions mentioned above. Salaried individuals paying rents for the houses they live in can claim HRA deductions and reduce their taxes partly or wholly as the case may be.
80GG of Income Tax Act deductions are unavailable to those who live in their self-owned property and when you opt to pay tax under the new regime.
How is HRA tax exemption calculated?
The deduction for HRA exemption is again the least of the amounts in the three below conditions.
- Actual HRA component in your salary;
- 50% of the amount of DA plus basic salary, if you live in a city declared a metro city or 40% if you live in cities that are non-metro cities:
- The rent paid in actual rent minus 10% of the amount from DA plus basic salary.
Example for HRA and 80GG deduction:
Mr Sheru is employed in Mumbai and takes up a rental accommodation for Rs 20,000 in the FY of 2019-20. His basic salary is Rs 35,000, and his DA is Rs 3000/- and forms a part of his salary. During the year, his HRA is 2.4 lakh per annum. Now, in this case, Mr Sheru can claim the entire amount of Rs 2.4 lakh pa as a tax deduction. The entire rent paid can reduce his tax liability by Rs 2.4 lakh for the FY 2019-20.
However, if his employer does not pay him any HRA as in the above case, then he can claim tax deduction under Income Tax 80GG Section. In such a case, he can calculate deduction for HRA exemption by considering the least of the three conditions set out or
- 25% of total income that is adjusted;
- Rs 5,000 per month;
- Or, the actual rent paid less 10% of total Income adjusted
What is the adjusted total income for 80GG?
The term total income adjusted for Section 80 GG of Income Tax Act rent deductions means the total income less the short and long-term capital gains U/S 111A, 115D or 115A. It also consists of the deductions under Sections 80C to 80U and the deductions made under Section 80GG. In such a case, he can only claim a tax deduction of Rs 5000/- per month or Rs 60,000/- per annum U/S 80GG.
How to live with your parents and claim HRA deduction?
Consider this example to understand the HRA tax deduction claim.
Sunita works in ABC Technologies in Bangalore and gets a salary with HRA but lives with her parents and not in rented accommodation. How should she claim the HRA as a tax deduction?
Sunita can claim the HRA as a tax deduction by paying rent to her parents. She will need to provide a rental agreement with her parents and show the rent transfer to her parents. This will help her parents and reduce her tax burden.
But, what happens if Sunita does not receive HRA in her salary? Can she then claim tax deductions on rents paid to her parents U/S 80GG income tax rental deductions tax? Read the conditions set out under Sec 80GG of Income Tax Act 1961 for eligibility for tax deductions U/S 80GG. The conditions are:
- The taxpayer must be salaried or self-employed.
- You do not receive an HRA component in your salary.
- You, your minor child, spouse or HUF of which you are a part, do not own residential accommodation at the place you reside in/ work in/ are self-employed in/ have your business in.
- If you own a self-occupied residential property, no deduction is allowed under section 80GG.
- You must fill in Form 10BA along with proof of rents paid.
In Sunita’s case, she has to prove that ‘she, her minor child, spouse or HUF of which she is a part, do not own residential accommodation at the place she resides or work or is self-employed or have her business in to be eligible for tax deductions. Note that your HRA claim must be supported by your parents as rental income in their ITRs filed. Of course, if their income is below the tax exemption limit, the issue of taxation in your parent’s hand is not present. The IT Department closely monitors all HRA claims. HRA can be claimed even when you own a house if you are claiming deductions U/S 80C on the principal amount borrowed and U/S 24 for the interest on housing loans if you have a genuine reason- for instance if the house is still under construction.
Also Read: Dearness Allowance (DA)– Understanding its Types and Calculation
Conclusion:
HRA is a component of the salary and has many facets that the common person does not understand. Under Sec 80 GG in income tax, when no HRA is paid with the salary, deductions can still be claimed for HRA under it. Therefore, we hope we have been able to clear your doubts regarding rent deduction income tax in this article.
Having trouble with filing ITR or Income Tax Returns? Use an app like Khatabook that can accurately help you compute all salary components and deductions. Try the app out today!
