ITR filing, HRA and Section 80GG: How to claim tax benefits on rent paid

Claiming HRA exemption: Documentation is key

A ubiquitous component of most salary slips, house rent allowance (HRA) is a benefit that even financially not-so-savvy individuals are well aware of. Consequently, the exemptions linked to HRA are also commonly known.

Despite this, however, certain lesser-known aspects of HRA-related tax exemptions can come as unpleasant surprises at the time of filing returns. Your chartered accountants could enquire about documentary proofs or worse, the income tax department could send notices seeking further details.

Also read: Simply Save | ITR filing - Know all the tax benefits linked to home loans and HRA

Claim HRA benefits while filing returns

Salaried individuals rarely miss out on claiming HRA exemptions while filing their investment declarations to their employers. If you have failed to submit the required proofs in time, however, chances are that your employer would have withheld TDS (tax deducted at source) on the HRA component of your salary.

In such cases, you can claim the HRA exemption while filing returns. 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 before handing out the amount to your landlord. However, instead of deducting this amount every month while making the payment, you can do so in one go in March,” says Bhavesh Shah, Senior Partner, Hasmukh Shah & Co, a Mumbai-based chartered accountancy firm.

Also read: Do not miss: Moneycontrol's income tax return filing guide 

No HRA? You are still entitled to tax breaks

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.

Ascertain parents’ tax bracket first

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 parents’ 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.

“Many people make the mistake of claiming tax benefit on HRA by paying rent to parents, without realising that their parents could be in taxable brackets. Some would get away with this earlier. However, the fact is that since landlord’s PAN is to be provided, the rent paid will reflect in parents’ Annual Information Statement (AIS). So, effectively, you might only end up shifting the income tax burden to your parents,” says Chetan Chandak, chartered accountant and Director, TaxBirbal.in, a Pune-based tax consultancy firm.

Do not take rent payments to parents lightly
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. “For one, you should have a legal agreement on a stamp paper in place. However, this might not be sufficient. If required, you should be in a position to prove that actual rent payments were made to your parents. You cannot argue that you paid them in cash,” says Chandak. You have to preserve these records to respond to any queries from the income tax department that may arise.

Do note that if parents stay in a rented accommodation and you live with them, it will be difficult to claim HRA exemptions. “This is because every rent agreement has restrictions on sub-letting the property. Your parents cannot technically let out part of the property to you and receive rent. In such cases, you should sign up to be the tenant and execute the agreement with the landlord,” says Chandak.