If you live in rented accommodation, the rent that you pay every month forms a considerable part of your monthly expenses. Paying income tax on a basic expense is not feasible and so, the Income Tax Act, 1961 introduced the concept of tax exemption on House Rent Allowance. The House Rent Allowance is an allowance paid by the employer to its employee to meet the cost of rented accommodation. The allowance is a tax-free benefit for employees subject to specified limits. But what if you are not a salaried employee or, your employer does not pay House Rent Allowance? Can you still claim a tax benefit on the rental expense?
Yes, you can through the provisions of Section 80GG of the Income Tax Act, 1961. Let’s understand how
What is Section 80GG of the Income Tax Act, 1961?
Section 80GG of the Income Tax Act, 1961 allows you a tax deduction for the rent that you pay out of your income. This section is applicable if
- You are a salaried employee but your employer does not allow House Rent Allowance
- You are a self-employed individual
Who can claim deduction under Section 80GG?
The following taxpayers can claim deductions under Section 80GG
- Individual taxpayers, including senior citizens. The taxpayers can be
- Salaried individuals
- Self-employed non-professionals
- Self-employed professionals
- Hindu Undivided Families (HUFs)
Deduction allowed under Section 80GG
The amount of deduction that you can claim from your taxable income under Section 80GG would be the lowest of the following
- INR 5000 per month
- 25% of the adjusted total income
- Rent paid – 10% of the adjusted total income
For calculation of the adjusted total income, your aggregate annual income would be deducted with the following
- Long term capital gains
- Short term capital gains under the provisions of Section 111A
- Income earned under the provisions of Sections 115A or 115D
- Deductions claimed from Sections 80C to 80U
- Deduction claimed under Section 80GG rent paid
Let’s assume that you are a self-employed individual living in a rented apartment for which you pay a rent of INR 20,000 every month. The aggregate income earned from your business, in a financial year, is INR 15 lakhs or INR 1.25 lakhs. If the deductions and other incomes are not considered, your adjusted total income would also be INR 15 lakhs.
In this case, the eligible amount of deduction under 80GG of the Income Tax Act, 1961, would be calculated as follows
|Rs.5000 per month
|25% of adjusted total income
|25% of 1.25 lakhs = Rs.31,250
|Rent paid – 10% of adjusted total income
|15,000 – 10% of 1.25 lakhs
= 15,000 – 12,500
= INR 2500
The lowest value is INR 2500 allowing you to claim a deduction of INR 30,000 under Section 80GG.
Conditions under Section 80GG for claiming deduction
To become eligible to claim a deduction under Section 80GG, you should fulfil some conditions. These conditions include the following
- House Rent Allowance should not form a part of your salary in any month during the financial year for which you are claiming deduction under Section 80GG
- In the case of individual taxpayers, you, your spouse and/or your minor child should not own a house in your name in a city wherein you reside, do business, are employed, or wherein you carry on your profession. In the case of Hindu Undivided Families (HUFs), the HUF should not own a residential property in the city wherein you live, work, or conduct your business or profession.
- If you own a house property in your name anywhere in the world and for which you are earning an income, rental income or otherwise, you cannot claim an 80GG deduction.
- To claim a deduction under 80GG, the Income Tax Act stipulates that you need to fill and file online Form 10BA
Filling Form 10BA
Form 10BA is an important document that is needed to claim an 80GG deduction. It is a declaration made by you to claim the deduction. You would have to fill the form with the following details
- Your name and PAN card number
- Complete address of the rental property with the PIN Code
- How many months have you been living on the property
- The mode of paying the rent
- The amount of rent
- The full name and complete address of the landlord or the owner of the property
- A declaration stating that you, your spouse, or dependent child does not own any property
- If the rent is more than INR 1 lakh annually, the PAN card number of the landlord
You have to file the form online through the income tax department’s website. The process is as follows
- Visit the e-filing website of the income tax department which is https://www.incometax.gov.in/iec/foportal
- Log into your online tax filing account
- On the homepage of your account, under ‘e-File’ select ‘Income Tax Forms’ and then select ‘File Income Tax Forms’.
- A new page would open wherein you should select ‘Others (Sources of income not relevant)’
- A list of forms would be shown from where select Form 10BA and click on ‘File Now’
- Provide the relevant information in the online form and file it online on the tax portal itself.
Exceptions to deductions under Section 80GG
There are two main exceptions to the deductions allowed under Section 80GG. If any of these exceptions are fulfilled, the deduction would not be allowed. The exemptions are as follows
- If you have another property in another city, it would be deemed to be let out if you don’t live in it. You would, thus, not be able to claim a deduction under Section 80GG.
- If you own a property jointly with anyone else, you would not be able to claim the deduction under Section 80GG even if you don’t live in the co-owned property.
Alternative avenues to save tax
Besides Section 80GG, you can save taxes through alternative avenues too. Have a look –
- Section 80C
You can claim a deduction of up to INR 1.5 lakhs by investing in avenues eligible under Section 80C. Some of these avenues include life insurance policies, Equity Linked Saving Schemes (ELSS), Public Provident Fund (PPF), National Saving Certificate (NSC), etc.
- Section 80D
If you invest in a health insurance policy for yourself and your parents, you can claim deductions up to INR 1 lakh on your taxable income.
- Section 24(b)
If you have a home loan, interest payments towards the loan would be allowed as an exemption from your income up to INR 2 lakhs.
Use these sections to claim additional deductions and exemptions and bring down your tax liability.
So, if you don’t own any property and you are paying rent, claim the rent paid as a deduction under Section 80GG if you are self-employed or if your employer does not allow you House Rent Allowance.
You can enter into a rent agreement with your parents and pay them rent every month. If you do that, then you can claim the deduction under Section 80GG for the rent paid.
You would have to submit the rent agreement and the rent receipts to claim the deduction under Section 80GG. Your PAN card and the landlord’s PAN Card in case the rent exceeds INR 1 lakh in a year, would also be needed.
No, deduction under Section 80GG is available only for resident Indian taxpayers.
Since you claimed House Rent Allowance exemption in the financial year, deduction under Section 80GG would not be available even when your new employer does not allow HRA.
Yes, senior citizens can also claim the deduction under Section 80GG if they pay rent for their accommodation and they fulfil the conditions to claim the deduction.