Section 80GG of the Income Tax Act provides deductions related to house rent based on certain conditions. Some of these entail being an individual or a Hindu Undivided Family (HUF), being self-employed or salaried, etc.
One of the most important tax deductions available to us is that on house rent. This is covered under the Section 80GG of the Income Tax Act. This is especially useful to employees who do not receive house rent allowance (HRA) from their employers. Tax exemption under Section 80GG depends on your salary, the city in which you are staying (Tier-I, Tier-II, Tier-III, etc.), the rent amount and the HRA received.
Deductions under Section 80GG
For you to be able to avail the house rent-related deductions under Section 80GG, the following conditions have to be met:
- You should be an individual or Hindu United Family (HUF). A company cannot claim house rent deductions.
- You need to be self-employed or salaried.
- You should not be getting HRA benefits in your salary.
- You need to fill and submit Form 10BA to declare that you are not claiming benefit of Self-Occupied Property on a house in any other location or in the same location as you are employed.
- If your rent paid is more than Rs. 1 lakh per year, you need to submit the PAN Card of the owner of the house that you are living on rent in.
- You can claim rent even if the house you are renting out is semi-furnished or fully-furnished.
Under this section, you can claim the least of the below applicable amounts:
- Rs. 60,000 annually (Rs. 5,000 monthly)
- The amount that is equal to the total rent paid minus 10% of the total income
- 25% of annual salary
To understand this, let us consider an example. Ramesh earns Rs. 7 lakh annually and does not get HRA. He is paying a rent of Rs. 18,000 per month, i.e. Rs. 2.16 lakh. Let us now apply the above 3 amounts to determine the corresponding amounts. Under point 1, the exemption amount is Rs. 60,000. According to point 2, the amount would be – 2,16,000 – 70,000 (10% of income) – Rs. 1,46,000. As per point 3, the amount would be Rs. 1.75 lakh. Since the least of these amounts is applicable as tax deduction under Section 80GG, Ramesh will be able to claim only Rs. 60,000 as tax deduction.
Exceptions under Section 80GG
- You cannot claim house rent deduction if you own a house in the location where you are employed or operate a business.
- You cannot claim house rent deduction if you are claiming benefit for an owned house in another location as Self-Occupied Property. If you are living in one city and have a house in another city/town it will be considered are rented out.
If you are living with your parents, there is an interesting way to avail the benefits of Section 80GG. You could enter into a rental agreement with your parents and pay a specific amount – at least Rs. 60,000 – as rent to your parents. However, your parents will have to show that amount as income in their income tax declaration.
With the real estate rates nowadays, it is quite impossible that the least amount would be anything other than the limit of Rs. 60,000 allowed under Section 80GG. And if you are paying rents lower than Rs. 5,000 per month, it is highly likely that you are in a smaller town and your income is proportionately low and hence exempt from payment of income tax altogether. In addition, most companies nowadays offer House Rent Allowance as part of the salaries, which will automatically exclude you from being able to claim benefits under Section 80GG.