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Get Tax Exemption On Rent (Even If You Don't Get HRA)

Most people are aware that they can claim deduction in their income tax, for the House Rent Allowance (HRA) received by them from their employer.

See 'How to calculate your HRA tax benefit' for the calculations and other relevant details on the same.

However, what happens if you are staying in a rented accommodation (whether furnished or unfurnished), but your salary does not include any house rent allowance? Or, you are a self-employed person with no employer paying you any HRA?

Well, there is (some) good news!

Income Tax Act has — vide Sec 80GG — provided some relief for such tax payers too.

Under Sec 80GG you can claim some deduction for the rental expense incurred during the year.

This, however, is subject to the following conditions:
1. You do not get any allowance from your employer specifically towards payment of house rent
2. You, your spouse or your minor child do not own any residential property at your place of residence, business or employment
3. You should also not be owning a 'self-occupied' house in any other place; it should a deemed let-out property.

If you meet the above eligibility criteria, you can claim deduction, for the rent paid, from your total taxable income for the year.

The amount that you can claim as deduction u/s 80GG would be minimum of the following:
a) Rent paid minus 10% of the total taxable income*
b) 25% of the total taxable income*
c) Rs.5000 per month Rs.2000 per month

Suppose a person has an income* of Rs.5 lakhs p.a. and the rent paid during the year is Rs.2 lakhs. Accordingly, the amount allowed to be deducted would be minimim of the following:
a) Rent paid - 10% of income = Rs.2 lakhs - Rs.50,000 = Rs.1.50 lakhs
b) 25% of income = Rs.1.25 lakhs
c) Rs.60,000

Hence, the deduction allowed would be Rs.60,000.

(* The 'income' for the purposes of Sec 80GG is equal to the total income, before allowing deduction for any expenditure under this section.)

To claim the aforesaid deduction, you have to file a declaration as per Form 10BA providing all the necessary details to the tax authorities.

Of course, in present day context this maximum exemption limit of Rs.5000 per month is negligible. In fact, this amount was a mere Rs.2000 per month for many (many) years until the FY 2015-16.

It was only in the budget for the FY 2016-17 that the deductible amount was raised to Rs.5000 per month.

Since the IT Act has become unwieldy, small tinkering here and there is not the right approach. Complete overhaul and extensive simplification is required.

The intentions of the Govt. seemed good when it came out with a new and simple Draft Direct Tax Code.

Unfortunately, despite being in the pipeline for many years, it did not see the light of day... and is now probably shelved. More importantly, during this period, the draft itself underwent many changes and became almost as complicated as the Act it proposed to replace (allegedly under the influence of certain vested interests, who would like to keep things as complicated as possible.)

[This post is an update of the earlier blog posted on Jan 22, 2014.]

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