Exemption can also be claimed on rent paid despite owning a house, provided a few conditions are met
The Income Tax Appellate Tribunal, Delhi, recently ruled that House Rent Allowance (HRA) exemption under the Income-Tax (I-T) Act, 1961 cannot be denied on the ground that the assessee paid rent to his spouse. The ruling said that the wife is a doctor who possesses the resources to purchase a house, as is apparent from her income-tax return.
Many such situations arise where it is not clear if a taxpayer is eligible for exemption on HRA.
Rent paid to family members
Suppose that you live in your parental house. Can you pay rent to your parents and claim HRA benefit? Deepak Jain, chief executive, TaxManager.in, says, “Yes, you can. The only condition is that, according to the ownership documents, you should not be the owner or the co-owner of the house. Moreover, neither your spouse nor a minor child should be the legal owner.”
Nowhere do provisions of the I-T Act explicitly prohibit payment of rent to family members. Hence, any taxpayer paying rent to his family members can claim HRA exemption under Section 10(13A) of the I-T Act.
There is a precondition for the recipient of the rent as well. Suresh Surana founder, RSM India, says, “The recipient of the rent should have ownership rights over the tenanted property.”
Payment of rent to family members, especially the spouse, has always been a contentious issue since the relationship between the payer and the payee is non-commercial in nature. Surana adds, “Such rent transactions could be subjected to scrutiny by the revenue authorities. The possibility of litigation cannot be ruled out.
Hence, maintain the necessary documentary evidence necessary to substantiate that the transaction is genuine.”
Own house but live on rent
Even if you own a house, you can avail of HRA exemption, provided you pay rent for accommodation. However, there are a few caveats. Archit Gupta, chief executive officer (CEO), Clear.in, says, “You should have a good reason for not living in the house that you own. The reasons could be that you work in another city, your office is too far away from your house, or the house is in a distant suburb of the city. But remember, you may need to provide these explanations to the income-tax authorities if they decide to scrutinise the details provided by you.”
If you own a property in the same city but live in a rented accommodation, you can claim HRA exemption only if your house is let out. If your house is self-occupied or vacant, you cannot claim HRA exemption.
Don’t get HRA but pay rent
If an employee doesn’t receive HRA from his employer, or is not eligible to claim HRA exemption, he can still, under Section 80GG, claim deduction on rent paid. Naveen Wadhwa, deputy general manager (DGM), Taxmann, says, “Section 80GG allows deduction of rent paid by an individual for any furnished or unfurnished accommodation occupied by him for the purpose of his own residence. This deduction can be claimed by an employee and even by a self-employed person.”
To be eligible to claim deduction under Section 80GG, it is mandatory that the taxpayer, his spouse, minor child or Hindu Undivided Family (HUF) of which he is a member, should not own any residential house property at the place where he ordinarily resides, performs office duties, or runs his business or profession. Surana adds, “Also, the assessee should not own any residential accommodation, which is occupied by him, at any other place.”
Tax benefit you can avail on rent
When you pay rent to a family member, the HRA exemption you can claim will be the least of the following amounts:
- Actual HRA received
- 50 per cent of salary for the metro cities of Mumbai, Kolkata, Delhi or Chennai, or 40 per cent of salary in case of other cities
- Rent paid in excess of 10 per cent of salary
When you avail of relief under Section 80GG, the deduction will be the least of the following:
- Rent paid in excess of 10 per cent of adjusted total income
- 25 per cent of adjusted total income
- Rs 5,000 per month or Rs 60,000 in a financial year