House rents can become a real burden, mainly in metropolitan cities where getting a house on rent is difficult. Since the demand for the rented house is so high, the rent skyrockets daily. However, HRA is a financial benefit for salried employees that provide them with tax exemptions on the rent they pay for their accommodations. But, for those who have to rent a house but do not receive HRA (House Rent Allowance), like self-employed individuals, it may hurt their monthly income. However, there is a provision in the Income Tax Act that can be a savior for you. As per the Income Tax Act of 1961, section 80GG allows you to claim a deduction on yearly rent.
What is Section 80GG of Income Tax Act?
Self-employed individuals are not eligible for HRA exemptions because this provision is specifically designed for salaried employees who receive HRA as part of their salary package. While self-employed individuals cannot claim HRA under Section 10(13A) of the Income Tax Act, they do have alternative options to reduce their taxable income related to housing expenses, Section 80GG. Section 80GG allows an individual to claim a deduction on the rent that is paid towards a furnished or unfurnished house. The house must be in use for their residential accommodation.
Eligibility Criteria for Section 80GG
- Only individuals and Hindu Undivided Family (HUF) are eligible to claim these tax deductions. Businesses or other enterprises cannot avail the same tax discounts upon paying rent in a given financial year.
- Individuals who are either salaried professionals or self-employed can take advantage of this provision. If one has no income to speak of, he/she is disqualified from seeking Section 80GG income tax benefits, even if he/she pays rent.
- Those seeking to avail this tax rebate need to submit a duly filled Form 10BA to the government beforehand. This Form is a declaration that the individual filing it does not claim to benefit from a self-occupied property in any location.
- Section 80GG of Income Tax Act is specifically designed for those who do not receive home rent allowance from their employers. If a person’s salary includes HRA payment, he/she is ineligible to claim income tax rebates related to housing rent.
- If the yearly rent amount exceeds Rs.1 lakh, the taxpayer will need to submit a copy of the homeowner’s PAN card to claim tax benefits under Section 80GG of Income Tax Act. Keep in mind that this PAN card must belong to the property owner where one resides on rent.
- An individual must not have claimed HRA at any time during the fiscal year for which he/she is claiming the tax benefit under Section 80GG. This is a crucial point for those who have changed employers in the last year.
How are Deductions Under Section 80GG Calculated?
80gg deduction limit and tax deductions under this section are based on Tax Rule 2A. As per Section 10(13A), the least amount from the following calculations is considered a non-taxable income.
- Rs.5000 per month or Rs.60000 a year.
- The yearly rent amount minus 10% of the taxpayer’s adjusted total income.
- 25% of the adjusted total income for a year.
Keep in mind that after calculating the three figures for an individual, only the least from them is considered the Section 80GG deduction applicable.
Refer to the following table to learn two distinct examples of tax deductions based on different income and rent payments –
Factors | Individual A | Individual B |
Adjusted Total Income (ATI) | Rs.200000 | Rs.180000 |
Total Yearly Rent Payable | Rs.80000 | Rs.60000 |
Deductions under Section 80GG of the Income Tax Act | ||
Yearly Rent – 10% of ATI | Rs.60000 | Rs.42000 |
25% of ATI | Rs.50000 | Rs.45000 |
Rs.5000 per month | Rs.60000 | Rs.60000 |
Deductions Applicable | ||
Rs.50000 | Rs.42000 | |
As one can clearly perceive from this table, Individual A is liable to receive a higher tax deduction under Section 80GG, primarily because his/her adjusted total income is higher than that of Individual B.
Moreover, the clause where 25% of the ATI is considered as tax discount is applicable in the first case, since the quantum in this calculation is lower than the other two clauses. However, in Individual B’s case, yearly rent minus 10% of ATI gives a lower quantum than the other calculations. Thus, it is the applicable tax deduction for Individual B.
How to claim deduction under Section 80GG?
- Your name
- The address of the residential premise where you have been living on rent. You have to provide the full address with the postal code as well
- Your PAN details
- The tenure for which you are living in the rented property
- Amount of rent and mode (through cash, bank deposit, etc.) of payment
- The address and name of the owner of the house. (i.e., landlord).
- A declaration in form 10BA that you do not own any residential property in your name or your spouse’s name and even in the name of your minor child or HUF of which you are a member.
Exceptions under Section 80GG
- You cannot claim a house rent deduction if you own a house in the location where you are employed or operate a business.
- You cannot claim a house rent deduction if you are claiming benefits 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 yourself of the benefits under 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.
FAQs
What is Section 80GG of the Income Tax Act?
Section 80GG provides tax relief to individuals who do not receive House Rent Allowance (HRA) and are paying rent for a residential accommodation. The deduction is available for rent paid on the rented property, subject to certain conditions.
What is the maximum deduction available under Section 80GG?
The maximum deduction under Section 80GG is the least of the following:
- ₹5,000 per month (₹60,000 per year).
- 25% of your total income.
- Rent paid minus 10% of your total income.