ITR filing 2023-24: How to maximise rent tax benefits, steer clear of pitfalls to avoid I-T notices

Income tax: Claim HRA, section 80GG tax benefits while filing returns

House rent allowance (HRA) is a familiar tax benefit for salaried taxpayers, especially those renting their accommodation, prioritising claiming the HRA exemption under section 10(13A).

However, the financial year 2023-24 introduced changes aligned with the Budget 2023. Starting April 1, 2023, the new default regime significantly streamlined exemptions.

So, in case you missed explicitly picking the old tax regime in your proposed investment declaration in April, your organisation would have calculated your taxes as per the new tax regime. That is, without considering exemptions and deductions such as HRA and section 80C tax-savers. However, you can still avail of this tax break while filing your income tax returns before July 31.

The tax-exempt HRA will be the lower of 50 percent (40 percent if you live in a non-metro city) of your basic salary plus dearness allowance, if any, or the actual HRA or the actual rent paid minus 10 percent of your basic salary and dearness allowance.

You do not have to submit any documents at the time of filing your income tax return. However, you must preserve your rent receipts and rent agreements in any case.

If your rent exceeds Rs 50,000 per month, you will have to deduct tax (TDS) before handing out the amount to your landlord.

Also read: How to claim tax benefit on rent paid without HRA

If you are self-employed or HRA does not form part of your salary structure, you will not be eligible for the HRA exemption under section 10 (13A). However, you will be entitled to relief under section 80GG. You can claim a deduction of up to Rs 5,000 a month, 25 percent of your total income or actual rent paid minus 10 percent of total income, whichever is lower.

However, you will not qualify for this concession if your spouse, minor child or your Hindu Undivided Family (HUF) - in case you are part of one - owns a house in the place where you usually stay.

There is no bar on paying rent to parents if you are living in their house and availing of HRA tax exemption. However, the rent you pay will be treated as your parent’s income. In many cases, parents are likely to be retired individuals who fall in lower tax brackets and hence tax payable will be lower. However, there could be exceptions, so ensure that you compute the tax impact for your parents before you take the call.

Do not make the mistake of assuming that your parents need not declare rent paid by you as their income. After all, you will have to provide landlord’s PAN when you claim HRA benefits. With the I-T department being armed with the Annual Information Statement (AIS) and advanced capabilities to track financial transactions, it has become tougher to conceal income.

Also read: Missed utilising all tax deductions? Claim them while filing your returns

From the income tax department’s perspective, your familial ties will not entitle you to any leeway in terms of documentation. You need to have proper proofs in place even though these papers are not required to be submitted while filing returns. It would be wise to have a legal agreement on stamp paper in place, besides rent receipts and cheques or bank transfer records. You have to preserve these records to respond to any queries from the I-T department should they arise in future.

Do note that if parents stay in a rented accommodation and you live with them, claiming HRA exemption will not be a simple affair. This is because the rental agreement is bound to place restrictions on sub-letting the property. In such cases, you would be better off signing the rent agreement with the landlord and pay rent to avoid hassles and I-T queries later.