House Rent is a Major Expense for Individual especially for those staying in Metro and Other Cities. However, the same House Rent Expense can help save some tax for salaried employees. In current salary packages, employees receive house rent allowance (HRA) to meet the cost of renting an house. A salaried employee staying in a rented house can claim a tax exemption towards the HRA received, subject to the limits specified in this regard under Section 10(13A) of the Income Tax Act.
The tax exemption is limited to the least of-
i) Actual HRA received
ii) 50% of the salary (if staying in Mumbai, Delhi, Kolkata, Chennai) else 40%
iii) Actual rent paid less 10% of salary.
Note: for section 10(13A), Salary means Basic salary plus dearness allowance (if provided by the terms of employment) plus commission based on fixed % of turnover
How it applies: For example, assume one earns a basic salary of Rs 20,000 per month and rents a flat in Mumbai for Rs 5,000 per month. His actual HRA is Rs 8,000. He is eligible for 50 percent of the basic pay for HRA exemption.
As such, Rs 3,000 per month is the least and will be the exemption allowable for HRA deduction. If he has no rent outflow, he will have to pay tax on full allowance of Rs 8,000. Also, tax exemption can be claimed only where HRA is part of the salary package. Depending on the amount paid as rent and HRA received, tax exemption can be claimed. If one receives HRA for the period during which he did not rent an accommodation, then no exemption can be claimed.
You need to submit proof of rent paid through monthly rent receipts and rent agreement. Monthly rent receipts should have a one rupee revenue stamp affixed with the signature of the person who has received the rent, along with other details such as the rented residence address, rent paid, name of the person who rents it etc. If one is unable to do so, he/she could claim the exemption while filing the tax return and seek a refund. The rent receipts act as proof of payment of rent and should, therefore, be preserved.
Central Board of Direct Taxes (CBDT) has vide CIRCULAR NO. 4/2020, Dated: January 16, 2020 said if annual rent paid by the employee exceeds Rs 1,00,000 per annum, it is mandatory for the employee to report PAN of the landlord to the employer. In case the landlord does not have a PAN, a declaration to this effect from the landlord along with the name and address of the landlord should be filed by the employee.
If a ready to use home for which home loan is taken is rented out to someone else, while you continue to reside in a rental accommodation then HRA along with the home loan benefits could be claimed. On the other hand, since you are recipient of rental income, then the tax would be applicable to the rental income received. Hence, in specific cases an individual can claim both HRA and home loan benefits together. Also, employers do have regulations in this regard, therefore, it is wise and advisable to cross check with the employer before you claim HRA and home loan benefits together.
Republished with amendments