Submitting your rent receipts to claim your HRA deduction may not be enough today. Read on to find out why.
Last year, an Income Tax tribunal rejected the HRA exemption claim made by a salaried individual for the rent paid to her mother. It rejected the claim on the grounds that there is no proof to substantiate that payment of rent has actually happened. It refused to accept the rent receipt as proof as she could have easily obtained that from her mother without paying the rent.
Additional Reading: How To Calculate Your HRA
Here’s a list of dos and don’ts that you should bear in mind while claiming tax exemption of HRA:
- A valid rent agreement is a must. It must mention all the relevant details such as the amount of monthly rent, the time period of rent agreement, any utility or maintenance bills paid by you etc. The agreement must mention the premises rented by you, other charges such as utility or property tax if payable by you.
- If you’re sharing the accommodation, then the rental agreement should also mention the number of tenants co-sharing the space, the ratio in which the rent, maintenance, and utility bills are being split among your flatmates.
- It’s advisable to make rent payments via banking channels instead of cash. This will provide an electronic trail of money for the transactions occurred. It will prove useful when a dispute arises in the future.
- Irrespective of the channel used for making payments, you must ask for the receipt for rent paid every month. Especially if the rent paid per month exceeds Rs. 3,000.
- In addition to rent receipts, if your payment towards rent exceeds Rs. 1 lakh annually, then it’s mandatory to provide the PAN of your landlord to your employer to avail the full benefit of HRA exemption. It helps you lower your TDS deduction.
- In case the PAN of your landlord is not available, then your landlord should be willing to give a declaration to this effect. Check and confirm with your landlord before taking the house on rent so that you’re able to avail the benefit of HRA exemption from your employer. Additionally, you will also need to obtain ‘Form 60’ duly filled by your landlord, in case PAN is not available. You’ll need to submit these to your employer.
- There might be circumstances where an individual pays higher rent than what the rental agreement indicates and pays the difference in cash. If that happens, only rent receipt furnished by the individual mentioning the amount paid will be subject to tax exemption. Any amount paid over and above the rent receipt shall not be considered for the purpose of exemption by employer.
- You must physically reside in the house mentioned by you while claiming HRA exemption. In case your parents own the house, ensure that they mention the rental income while filing their returns.
- If you’re paying rent more than Rs. 50,000 every month, remember to deduct tax at source (TDS) @ 5% of the rent paid to your landlord. Interest at 1% is levied in case you forgot to deduct it and 1.5% per month where TDS is deducted but not deposited.
- If you do not provide the PAN of your landlord, then you cannot claim tax exemption for HRA from your employer while withholding TDS on salary. While Income Tax Act does not restrict the employee from claiming tax exemption for HRA while filing returns but there will be a mismatch in the salary income reported in the Form 26AS by your employer vis-à-vis that reported by you in your return. This may prompt the department to send a communication seeking a response regarding the mismatch.
Additional Reading: HRA Exemption And How To Claim It
There might be some special cases in claiming HRA tax benefit, such as:
1. Paying rent to family members:
The rented premises must not be owned by the person claiming the tax exemption. So if you stay with your parents and pay rent to them, you can claim that for HRA tax deduction. However, you cannot pay rent to your spouse. In view of the relationship, you are supposed to take the accommodation together. Transactions like these can come under the Income Tax Department scanner.
Even if you are renting the house from your parents, make sure you have documentary evidence of financial transactions regarding your tenancy between you and your parent. Keep a record of banking transactions and rent receipts. The tax department can reject your claim citing inauthenticity of transactions as the reason.
2. Own a house but live in a different city:
One can simultaneously avail the benefit of deduction available for the Home Loan against “interest paid” and “principal repayment” and HRA in case your own home is rented out or you live in another city.
3. Individuals who don’t get HRA but pay rent:
There may be some employees who might not have an HRA component in their salary structure. Also, a non-salaried individual might be paying rent. For them, Section 80 (GG) of the Income Tax Act can be of help.
An individual paying rent for an accommodation can claim a deduction for the rent paid under Section 80 (GG) of IT Act. This is applicable only if he’s not paid HRA as a part of his salary by furnishing Form 10B.
The least of the following is available for exemption from tax under Section 80 (GG):
- Rent paid in excess of 10% of total income.
- 25% of the total of the total income. Under this section, the total income is calculated as gross total income minus long-term capital gains, the short-term capital where Securities Transaction Tax (STT) has been paid and deductions available under Section 80C to 80U, except 80 GG.
- 5,000 per month.
With these pointers in mind, claiming HRA for tax deduction shouldn’t be too difficult for you. If you’re looking to buy a dream home for yourself, have you explored our Home Loans yet?