Income Tax Benefits On House Rent

09:30 AM 17 Apr 2019

Irrespective of vast reasons like a need to continually shifting place, or may be of financial goal, or never found their dream home, a person becomes a tenant and reside in a rented house.

With a vast database of property related information, PropertyAdviser can help you find your dream home at affordable prices in one of the fast emerging metropolitan city, Hyderabad.

But, with rents rising at a sky-rocket pace, isn’t the government is doing anything to provide comfort for rented people. Are all tax benefit schemes are only for house owners and not for tenants? To solve this issue, HRA had been introduced.

What is HRA?

House Rent Allowance, i.e. HRA, is a share of the salary that is contributed by the employer to employee. Adhere to the increased costs of the rented houses; employers pay HRA to the employees. The main reason for HRA is, every year it helps employees with tax benefits for the accommodations.

It depends on the various reasons like the amount of salary received and the residing city of the employee. Only salaried persons can avail the benefits and not the self-employed people. To utilise the benefits employees mustn’t possess their house in which they live in and must pay rent.

Who Are Qualified for House Rent Income Tax?

Any salaried of self-employed person can avail the benefits. But, for each category, a specific set of guidelines are involved.

How to Calculate HRA?

Let’s consider that a person is living in a metropolitan city with a basic pay of Rs 50,000 Per Month. As per this, the HRA will be 25,000 as it is a metropolitan city. But if they pay an actual rent of Rs 20,000 then,

Actual HRA per year will be Rs 25,000 X 12 = Rs 3,00,000

Actual rent paid (Rs 20,000 X 12 = Rs 2,40,000) – 10% of salary (Rs 60,000) = Rs 1,80,000 50% of basic salary [(Rs 50,000 X 12) X 50%] = Rs 3,00,000

Considering the least amount, 1,80,000 will be exempted from the income tax.

Income Tax Benefits for Salaried Persons

Under Section 10 (13A) of the Income Tax Act, any salaried person that receives HRA from their employers is entitled to fulfil certain conditions to enjoy house rent income tax benefits.  Anyone who qualifies these standards are only liable and come under this category.

The foremost one is actually to stay at a rented house. It must be in the same city as of your current employment. You shouldn’t be the owner or the partial owner of the house and should live in a residential home and must pay rent. It shouldn’t be like you are a co-owner, you pay rent to the partner or you should lease your property to your employer, which in turn he pays you the amount as your rent.

How Income Tax Exemption On HRA Is Calculated?

For a salaried person, the income tax exemption is calculated as the least of the following,

  • House Rent Allowance received by the employer.

  • If the employee stays in metropolitan cities than 50% of the salary is considered

  • 40% of the salary is considered if the employee resides in other than in cosmopolitan cities.

  • Actually paid rent is reduced by 10% of the salary

Based on the above points, the salary is calculated. If in any case, the employee paid rent doesn’t exceed by 10% of the salary, then no HRAtax exemption will be given.

House Rent Income Tax Benefits for Self-Employed

What if an employee doesn’t receive HRA from their employer or they are self-employed? Government has levied tax benefits for all under certain conditions. Under Section 80GG of the Income Tax Act, a self-employed or employees who don't receive HRA from their employers can enjoy tax benefits.

A person can claim a maximum tax deduction of Rs 60,000 PA or Rs 5,000 PM. The tax deduction is done on the total income and is limited to 25% of the total income, or actually paid rent is reduced by 10% of the salary.

In such a case, you are subjected to certain liabilities like one can’t claim house rent tax benefits even if their spouse or their child has own accommodation in the same area. Even if their owned property is let-out, they cannot claim the benefits. And if you own a property at any other place and is declared as self-  then also it doesn't fulfil these criteria.

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By Govi