Most of us are confused when interpreting income tax laws. I often re-read some tax sections and interpret in a different way sometimes. One such section is section 80gg of Income Tax Act to deduct rent paid.
I am writing this post in response to an email received from Mr. Sivaji from Pune and I quote.
My friend tells me I cannot get Rs 2000 deduction because I own a property in my home town used by my parents on which I have home loan. But I see you mentioned in one of your post one can get Rs 2000 deduction under section 80GG if he does not get any HRA. Why am I then not eligible for deduction.?
Using Section 80 GG of Income Tax Act to deduct rent paid
Not every individual understands the tax deductions fully. With proper knowledge of the terms and sections, you could probably claim deductions that will earn/save you decent money.
Of the different sections of the Income Tax Act, one of the most unfamiliar section is the 80GG.
Under Section 80GG, an individual is eligible to claim deductions for house rent allowance. The deduction is applicable for those individuals who do not receive HRA.
Salaried employees are well aware of HRA and its benefit while filing IT returns. The section 80GG of the income tax offers a tax benefit for individuals and employees who do not receive rent allowance or those self employed.
The Section 80GG of the Income Tax is only applicable for individuals who do not avail HRA. It also holds true for people who do not claim a deduction for their rent in any other sections of the Income Tax.
However, to be eligible under the Section 80GG of the Income Tax, you required to meetthe following conditions:
- The Section 80GG is valid for individuals and HUF.
- The person or the recipient should be a salaried or self-employed. However, the taxpayer should not receive any amount under HRA.
- The taxpayer himself or spouse/minor child/HUF of which he/she is a member should not possess any property or accommodation at the location where they are working or carrying business activities.
- If the individual or the taxpayer holds the possession of accommodation or property in another place than stated above, the tax deduction seeking concession is not valid [Under Section 23 (2) or 23 (4)(a)].
- It is important to submit Form No.10BA, stating details of the expenditure incurred by him/her towards house rent.
Exemption for House Rent Allowance
According to Section 10(13A), the house rent allowance is exempt when you meet the minimum of the following amounts:
- Actual rent allowance received for the relevant period
- Rent paid for accommodation that is in excess by 10% of the salary for the corresponding period
- 50% of the salary for a residential house in metropolitan cities such as Mumbai, Kolkata, Delhi, and Chennai and 40% of the salary for accommodation in other locations for the relevant period
- The corresponding period is the accommodation period occupied by the assessee for a particular financial year
- The salary of the assessee includes dearness allowance but excludes other allowances and perquisites
- There will be no exemption of house rent allowance when the employee does not incur any expenditure on accommodation or lives in own accommodation
- It is crucial to furnish the PAN card of the property owner if the rent paid by the assessee is more than INR 1 Lakh per annum
However, as there is a considerable change to these factors, exemption of HRA requires periodic calculation but not on an annual basis. Nonetheless, if there is no change to these factors, you can add it to the exemption for the relevant period.
Individuals or employees who do not receive HRA as part of their salary have to seek exemption under Section 80GG. The deduction for the claim is possible by filing appropriate details during the Income Tax Return filing.
However,even at sake of repeating, the following conditions must be met:
- Exemption for HRA is available only to individuals or HUF
- The assessee is self-employed or salaried and does not receive any benefit under Section 10(13A) for House Rent Allowance
- The assessee or the spouse or the HUF should not possess any accommodation at the location of the work or carried his/her profession or business
- If the assessee owns a property at any other place, he/she shall not claim benefit from it as self-occupied property
If you, as a taxpayer, are claiming deduction under Section 80GG of the Income Tax Act, you require furnishing declaration in Form 10BA that satisfies all the conditions mentioned above.
Limitations of Section 80 GG
The deduction allowed under Section 80GG for expenditure towards the rent paid is the least of the following:
- INR 2,000 per month
- Rent paid minus 10% of the total income
- 25% of the total income earned by the taxpayer
The income of the taxpayer is the amount of total revenue received for a period.
Additionally, rent paid towards finished or semi-finished accommodation is also eligible for the claim under Section 80GG of the Income Tax.
How to calculate total income for calculating 80GG
For calculating total income, use below formula
Total Income = Gross Income – Capital Gains(Long & Short) – Deduction 80 C to 80U(except 80GG) – Income under section 115A and 115D
Illustration of deduction towards HRA under Section 80GG
Let us assume Mr. Sivaji earns an annual income of INR 3, 00,000 (after deductions).
He pays an annual amount of INR 1, 50,000 towards house rent. According to the conditions of Section 80GG:
- At INR 2,000 per month = INR 24,000
- Rent paid minus 10% of total income = INR 1, 50,000 – INR 30,000 = INR 1, 20,000
- 25% of total income = INR 75,000
Therefore, the least of the three findings is INR 24,000 and becomes eligible for the amount deductible under Section 80GG towards house rent allowance for a complete financial year.
Let us assume Mr. Sivaji has Rs 1,00,000 after other deductions. His rent paid is Rs 20,000 per annum. This is unlikely scenario as in most places rent will be above this and the net income already falls under nil income tax category . Just for theory and also because there may be many like my relatives who still pay Rs. 1000 per month rent in their village.
- At INR 2,000 per month = INR 24,000
- Rent paid minus 10% of total income = INR 20,000 – INR 10,000 = INR 10,000
- 25% of total income = INR 25,000
In this case only Rs 10,000 is allowed under section 80GG as deduction. But the person would already be under nil income tax category.
So in most cases you’ll see that people will claim only maximum 24,000 when using 80 GG ( from my friend who is a CA).
So from next time use section 80GG to judiciously deduct from your income and calculate final tax.
I hope this post on 80GG income tax for deducting house rent paid was useful to you. Did I explain clearly or still confused? Let me know in comments below.
Share this post on Facebook if useful as many of your friends will not know or not be using section 80GG.