NEW DELHI :
For most employees, house rent allowance (HRA) is part of their salary income. However, some small, and medium-sized companies may give a lump sum amount to the employees without any break-up. For an employee staying on rent, to claim deduction, HRA should be part of his or her salary income. However, Income Tax Act 1961 does provide for employees to claim deduction against house rent paid, even if HRA is not part of their salaries. Such employees can claim deduction against the house rent paid under Section 80GG of the Income Tax Act. The rules also apply to self-employed people. Let us understand the limit and the conditions under which one will be able to claim tax deduction under Section 80GG.
To claim deduction under Section 80GG, you should not have received HRA during any part of the financial year. “The taxpayer claiming exemption of HRA can’t claim deduction for rent paid under section 80GG,” said Tarun Kumar, a Delhi-based chartered accountant.
The person claiming deduction under Section 80GG should not be owning any house in the city of residence. In fact, there should be no house in the name of spouse, minor child or Hindu Undivided Family (HUF) of which the person is a member of, in the city where the office is located or business is carried out. So, if you have a family house in the city where you work, you won’t be able to claim this deduction.
“The deduction is allowed to a person who owns a house in any other city different from his occupation, but it shouldn’t be self-occupied or left empty. It should be a let-out property,” said Prakash Hegde, a Bengaluru-based chartered accountant. “This restriction is limited to the assesses only. The family members can own a property in another city, ” added Hegde.
The taxpayer has to file a form 10BA; only then will he be able to claim this deduction. It is a declaration made by the person that all the conditions of the section are met.
The taxpayer who has opted for the alternative, or new tax regime, will not be able to claim this deduction.
How it is calculated
The deduction has to be calculated based on a formula. The amount of deduction under this provision shall be lower of the three: a) the rent paid in excess of 10% of total income, b) 25% of the total income, c) a maximum of ₹5,000 per month. Therefore, the maximum deduction allowed during the year is ₹60,000. The total income for the purpose of calculation has to be considered after claiming all the deductions from the gross income of the taxpayer.
So, for example, if the total income of the person is ₹15 lakh for a year and the person is claiming deductions of around ₹2 lakh under various other sections including 80C, then ₹13 lakh will be considered as the total income of the person. So, if the person is paying rent of ₹12,000 per month ( ₹240,000 annual rent), then the person will be able to claim the least of the three: a) ₹110,000 (10% of ₹13 lakh minus ₹2,40,000), b) ₹60,000, and c) ₹325,000. Therefore, the lowest amount is ₹60,000 that the person will be able to claim under Section 80GG.
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