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11 things one should know about Renting a residence, House Rent Allowance and Tax Benefits

  1. Salary Income – Only people who are earning salary income are eligible to claim tax benefits towards rent paid in respect of residential accommodation. Secondly, as part of the salary one should have a component by name ‘House Rent Allowance (HRA). (So, check the appointment letter or payslip to see whether the company is giving HRA as one of the components of your salary)
  2. Stay in Rented House – Only those employees who are staying in a rented house and paying rent to the owner are eligible to claim tax benefits. So employee staying in a house owned by the spouse (wife or husband) is not eligible for tax benefits.
  3. Proof of payment – Employee has to submit the proof of payment of rent to the employer to get tax benefits. Some of the employers ask for rental agreement and many of the employers seek rental receipt from the owner of the property.
  4. PAN Card copy – Recently, Income tax department has issued a circular stating that the employers (companies) have to necessarily obtain PAN card copy of the owner of the property, if the rent paid by the employee is over Rs.1,00,000 per year. In case you fail to give PAN card copy, your employer may not be obliged to give HRA tax benefits. However, we are of the opinion that while filing your return, you can still go ahead and claim the tax benefits.
  5. Payment by cash/cheque – there is no restriction for paying rent in cash. However, we suggest paying rent through a cheque or online transfer. It is advisable to collect the rental receipt regularly.
  6. Renewal of rental agreement – Normally rental agreements are done for 11 months. So, it is advisable to renew the rental agreement on the expiry of the tenure. For renewal, you can simply write about the period of extension on the original agreement and both of you (owner and tenant) can sign the document.
  7. Amount of Exemption – The exemptionis limited to least of the following –
    1. Actual House Rent Allowance received from the employer or
    2. Actual rent paid in excess of 1/10th of salary (salary means basic + DA) Or
    3. 40% of the amount of salary (in case of Metros Mumbai, Delhi, Calcutta and Chennai you can to consider 50% of the amount of salary)
  8. Consider the exemption at the time of filing the return – Sometimes it may so happen that the employer would not have considered the HRA exemption while computing the tax liability. In such cases, the employee can compute the exemption at the time of filing income tax return and avail tax benefits.
  9. Proof of Payment – the employee is required to keep the proof of payment such as rental agreement, rent receipt and bank statement for 8 years. In case the income tax officer requires you to produce the documents, these documents must be made available to him.
  10. Rent to parents – This is possible provided you actually pay them. Secondly, they have to show it as their Income. Remember that the property must be owned by them. We suggest you to pay the rent through bank transfers or cheques
  11. HRA and housing loan – simultaneous tax benefits – If you are staying in a rented house you can avail tax benefit towards HRA. Simultaneously if you own a house which is given on rent or the house is in a different location, you can also claim tax benefit on housing loan.  
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About CA Prasad Chartered Accountant

CA Prasad Chartered Accountant
CA Prasad is a practicing Chartered Accountant and partner in Bangalore -based CA Firm. For further information or query, please email it to [email protected]
  • V Mahalingam

    What is the applicable TDS on house rental Income?

  • john

    Thanks for the info. Does anyone know where I can find a blank rent receipt to fill out?