House Rent Allowance (HRA) makes a significant part of your salary. The good part is you get tax benefit on this allowance if you live on rent. If you do not live in a rented house, then you need to pay full tax on the allowance amount. But there are instances when HRA claims get rejected due to inadequate paper work or not following the rules. To help you get the maximum tax advantage, Neeraj Agarwala, Partner, Nangia Andersen India, walks us through some of the common mistakes people make while claiming HRA deduction.
- HRA can only be claimed if it is a component of your salary. Salaried individuals need to ensure that the employment contract and salary slip specifically provide for HRA.
- HRA deduction is only available on rent paid for residential premises and such rent does not include cost of utilities like electricity, gas etc.
- Salaried individuals must ensure that rent receipt submitted to the employer is in prescribed format and contains particulars of the landlord, particulars of tenant, address of the premises, amount of rent paid, mode of payment and period for which rent is paid.
- Salaried individuals must ensure that rent receipt submitted to the employer is affixed with revenue stamp where rent paid is above INR 5,000 per month.
- PAN of the landlord is mandatorily required to be produced where annual rent is more than Rs 100,000. If PAN is not provided by the landlord, then the employee should obtain a declaration in Form 60 from the landlord and ensure that total income of landlord, declared in the form, does not exceed the maximum amount not chargeable to tax.
- Salaried employees must ensure that TDS @5 per cent is deducted and deposited as per the provisions of section 194IB where rent paid is more than Rs 50,000 per month. Further, challan cum statement of deposit in form 26QC should be submitted to the employer along with the rent receipt.
- Generally, HRA can only be claimed by an individual that does not own a residential premises. However, exception is made in case of individuals that own house property in one city but have to reside in another city due to employment. Only in such cases, HRA can be claimed by salaried individuals residing in rented premises.
- There are no restrictions for claiming HRA deduction on rent paid to parents/relatives. However, due to the nature of the relationship it is advisable to maintain requisite paper trail of payment and proof of lease.
1. The salaried individual must ensure that the property is owned by their parent/relative
2. The salaried individual must enter into a rent agreement with their parent/relative
3. The salaried individual must ensure that they are actually residing in the premises mentioned in the said agreement
4. The salaried individual must make rental payment through bank transfers for a paper trail of the payment
5. The parent/relative must declare the said rental income in their income tax return
- Last but not least you do not get full deduction on HRA amount. It is the lowest of the following three amount a) The HRA amount received by you b) 50 per cent of the HRA amount if you live in a metro city otherwise 40 percent c) Actual rent paid minus 10 percent of your basic salary including dearness allowance.
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