House rent allowance (HRA) is an exemption under section 10(13A) of the Income Tax Act. And this applies to you provided certain conditions are met, one such condition being that your employer actually gives you a house rent allowance.
But what if you are an employee, but your employer does not give you an HRA or if you are self-employed? In such a case, you certainly won’t qualify for an HRA exemption. But, there’s another section in the Indian Income Tax Act, called Section 80 GG, which comes to your rescue. Of course, you won’t get an HRA exemption, but you could qualify for a deduction for the rent paid by you.
But, before you start looking for your rent receipts, you have to meet a few conditions to qualify for this deduction. “You should not own any residential house at any place of your employment or business,” said Amit Dani, chartered accountant and certified financial planner, based out of Nagpur.
The second condition is that, you should not own a house at any other place which is claimed as self-occupied house. “So, if you work in Mumbai and claimed tax benefits for a self-occupied house in Pune, you will not qualify for deduction under Section 80 GG,” said Dani.
How much: The amount which you can claim under Section 80 GG will be the least amount of the following options.
1) Rent paid minus 10 percent the adjusted total income.
2) Rs 2,000 per month.
3) 25 percent of the adjusted total income.
“Adjusted total income here means your total income after allowing all deductions under Section 80, apart form Section 80 GG. But, it includes short-term capital gain tax (u/s 111A) and long-term capital gain tax,” said Dani.
Option 1: Let’s assume your adjusted total income comes at Rs 10 lakh and you pay a rent of Rs 10,000 a month, that is Rs 1.20 lakh for a year.
* Subtract 10 percent of your adjusted total income from the rent paid, which will work out to Rs 20,000.
Rs 120,000 – 10% of 10 lakh = Rs 20,000.
Option 2: Here you pay Rs 2000 per month, that is Rs 24,000 per year.
Option 3: 25 percent of adjusted total income, that is Rs 2.5 lakh.
So, in this case, you will be able to claim a deduction of Rs 20,000 as per Section 80 GG. Since, that’s the least amount amongst the three options.
“What we’ve observed that most people who qualify under section 80GG, usually fall under the Rs2000 per month deduction amount category,” said Dani.
To claim this deduction you will need to fill the form 10 BA. To get the form see here.