By Balwant Jain, CFO, Apnapaisa.com

All of us as human beings have three basic needs Roti, Kapda aur Makaan.

Last one is of special importance as it is the most difficult one to acquire and we  spend major part of our working life in saving money for the same. 

The lucky ones who are able to own one more property than what they need for their own use can get rent from it. But those who are not that lucky and do not own even one, can live in one by paying rent. Our income tax laws have provisions for both the scenario- where one is taking rent and other where one is paying rent with respect to house property. 

In this article I will discuss tax implication for both the scenarios. 

Income tax treatment for rent paid:

The tax benefits available for rent paid in respect of house property occupied by you can be classified into two categories- one where  the tax payer is in receipt of House Rent Allowance popularly known as HRA from  employer, other where  one is not  in receipt of any HRA, may be  employed or self- employed.
 
Persons in receipt of HRA:

Though full HRA received by you is not always exempt  from tax but Income Tax Act allows certain exemption in respect of HRA received. The extent to which HRA received by you shall be exempt depends on various factors like actual rent paid by you, the city you are living in and your salary. However in case where though you are in receipt of HRA but are not paying any rent, whole of the HRA received by you shall be taxable in your hands.

The exemption shall be least of the following three items:

a) Amount of HRA actually received
b) 50% of your basic salary and dearness allowance in case of person residing in any of four metros and 40% of basic salary and  dearness allowance in other cases.
c) Amount of rent paid by you in excess of 10% of your salary.

Let us understand this with an illustration.

For a person residing in Mumbai whose basic salary inclusive of dearness allowances is Rs. 25,000 per month is in receipt of HRA of Rs. 14,000 per month. He also pays  monthly rent of Rs. 10000. 

The extent to which the HRA shall be exempt shall be Rs. 7500/- being least of the following:

1. HRA actually received Rs. 14,000
2. 50% of salary  Rs. 12,500
3. Rs. 7,500 being rent paid beyond 10% of salary ( rent actually paid Rs. 10,000 - 10% of salary Rs. 2500 =  7500)

So out of Rs. 14,000 of HRA received only 7500 shall be exempt and the balance of Rs. 6,500 shall be taxable.  The above working shall be done for the number of months for which the employee has paid the rent.

Persons who are paying rent but not in receipt of any HRA:

Section 80GG of the Income Tax Act grants tax benefits to the people who though are not in receipt of any HRA are still paying rent for the house occupied by them. This provision applies  to employed as well as self- employed persons. A person shall be allowed deduction in respect of the rent paid by him which is in excess of 10% of his total income. However the actual amount of deduction i.e. excess of rent paid over 10% of your total income should not exceed in case 25% of your total income. However in case the deduction so calculated exceeds Rs. 2,000 per month then the amount of deduction shall be restricted to only Rs. 2,000 per month,

Let us understand this also with another example:

The rent paid is Rs. 60,000 for the whole year and the total income of the person is Rs, 2,50,000.

He will be entitled for a deduction of Rs. 24,00 being least of the three calculated as hereunder:

1. Rs. 35,000( i.e. excess of rent paid over 10% of total Income 60000-25000)
2. Rs. 62,500 (25% of total income)
3. Rs. 24,000 ( Rs. 2,000 per month)

As compared to the benefits available to people who are in receipt of HRA the benefit offered to people who are actually not in receipt of any HRA is very insignificant which in my opinion is very unjust.  The restriction in terms of absolute entitlement of Rs. 2,000 per month needs to be revised upwardly as the same was fixed in April 1998 and the rentals and real estate prices have since gone up manifold.

Tax treatment of rent received:

After having discussed the tax treatment for rent paid by you in respect of house property occupied by you, now let us understand the tax treatment when you receive the rent in respect of the property owned and let out by you.

In case you own a property and have let it out, the rent received by you is taxable under the head “Income from house property”. However before such income is calculated you are allowed two items to be deducted from the rent received. The first deduction is a fixed 30% of the rent received by you. The second deduction is in respect of interest paid by you on loan taken for the purpose of acquiring, constructing or repairing, renovating the house property.  There is no restriction on the amount of deduction that is available to you in respect of the interest paid on loans for such properties. The deduction shall be available in respect of the interest payable for the year in respect of the loan taken for the property. The deduction of interest is available even if you have borrowed the money from your relatives and friends and not necessarily from any bank or housing finance company.

I hope you have understood the tax treatment for rent paid and rent received.

ApnaPaisa is India's leading Online market place for financial products such as loans, credit cards and insurance plans. Author can be reached at www.facebook.com/apnapaisa.