Housing is a fundamental need for everyone. Some people have homes in their names, while others choose to stay in rented spaces, i.e. pay rent for their accommodation. Since it is a basic necessity, it does and can eat into the salary of individuals. To help taxpayers against this, the Income Tax Act of 1961 has certain clauses that can effectively reduce the tax liability for individuals.
The Income Tax Act introduced HRA or house rent allowance, which allows taxpayers to claim the tax benefits for rent that they pay for their accommodation. However, one needs to be careful while filing for an HRA deduction. A small mistake might lead to the rejection of the HRA deduction claim.
Here are the top 10 ways to ensure that your HRA deduction claim is not rejected.
- Valid Rent Agreement
It is the most fundamental document to establish some grounds between the tenant and the owner. One can get rent receipts quite easily but getting a bogus rent agreement is not all that easy to get by. A valid agreement that is signed by you and your landlord is essential, even if you pay rent to your parents. It outlines the rent that you are supposed to pay every month along with any other expenses.
- Sharing Accommodation
People usually share accommodation with friends or colleagues. In such cases, they might pay equal rent or decide on a mutually agreed-upon ratio. If that is the case, ensure that the name of all the parties involved is mentioned in the rent agreement.
- Physically Present
You must physically stay in the house to claim HRA for your accommodation and your landlord must show his or her rental income in their statements.
- PAN Details
Should your aggregate rent for a financial year exceed INR 1 lakh, you are required to submit the PAN details of the landlord. It is mandatory to do so.
- Payment Mode
It is always a good idea to pay your rent in digital form or electronic form. This establishes proof of payment. You must avoid paying rent in cash as much as possible.
- TDS
TDS on rent is applicable if your rent exceeds INR 50,000 per month. In such cases, it is the responsibility of your landlord to deduct TDS of 5% as per Section 194-IB. The TDS amount is usually collected in the last month of the previous financial year or the last month of your staying in the place. If not done, interest will be levied on the rent.
- Monthly Rent
In order to claim an HRA deduction, you must produce rent receipts for the rent that you pay. This is applicable if your rent exceeds INR 3,000. Make it a habit to ask for a rent receipt at the end of every month along with the mention of the mode of payment.
- Declaration in PAN Absence
If your rent for a year exceeds INR 1 lakh and your landlord does not have a PAN card, they are responsible to provide a declaration in FORM 60. You can submit this declaration to your employer to receive the full benefits of HRA.
- Higher Rent
In some cases, the landlord might provide a rent receipt for a certain amount and take the remaining in cash. In such instances, only the amount mentioned in the rent receipt will be considered for house rent exemption.
- 26AS
Some individuals at times forget to submit their PAN details or declaration to their employer. You cannot claim your hra deduction in such cases, while TDS is withheld on income. However, you can claim the house rent exemption in your tax returns. This is where you will see a mismatch in your 26AS and your tax returns.
House Rent Exemption
Section 10-13A outlines the exemption of tax that individuals with a salary are easily able to claim on the income received from their employer. As per the Income Tax Act, the lowest among the three will be considered as house rent exemption.
- The actual HRA that you receive from your employer
- The rent that you pay, deducted by 10% of your basic salary
- 50% of the Basic Salary (including the Dearness Allowance) if your accommodation is in metropolitan cities or 40% of your Basic Salary (including the Dearness Allowance) otherwise.
Here is a simple example to illustrate the same. Suppose your basic monthly salary is Rs. 50,000 and you receive an HRA of Rs. 16,000 per month and your actual rent is Rupees 15,000, here is the calculation.
| HRA that is Received | Rs. 16,000 |
| 50% of the basic salary | Rs. 25,000 |
| Rent paid, deducted by 10% of the basic | Rs. 15,000- 10% of 50,000 = Rs. 15,000- INR 5,000 = Rs. 10,000 |
| Exemption of HRA | Rs. 10,000 (lowest among the three) |
Taking care of the above will help you avoid any rejection of your hra deduction. This will in turn bring down your net taxable income and thus, your taxes as well.
