Decoding Rent Received Vis-A-Vis Rent Paid
India needs 25 million housing units and this is expected to grow to 39 million in the next five years. As housing remains a constant challenge for the people and the government alike, there are lucky ones who own a second property and earn rent from it. But those who can't afford a house can stay on rent. Our income tax laws have provisions for both the scenarios – where one is taking rent and other where one is paying rent with respect to a house property.
In this article we will discuss the tax implications for both cases.
Income tax treatment for rent paid
The tax benefits available for rent paid in respect of a house property occupied by you can be classified into two categories – one where the tax payer is in receipt of House Rent Allowance popularly known as HRA from employer, other where one is not in receipt of any HRA, may be employed or self-employed.
Persons in receipt of HRA
Though full HRA received by you is not always exempt from tax but Income Tax Act allows certain exemption in respect of HRA received. The extent to which HRA received by you shall be exempt depends on various factors like actual rent paid by you, the city you are living in and your salary. However, in case you are in receipt of the HRA but are not paying any rent, the HRA received by you shall become taxable.
The exemption shall be least of the following three items.
a) Amount of HRA - House Rent Allowance actually received
b) 50 per cent of your basic salary and dearness allowance in case of a person residing in any of the four metros and 40 per cent of the basic salary and dearness allowance in other cases.
c) Amount of rent paid by you in excess of 10 per cent of your salary.
For e.g., for a person residing in Mumbai whose basic salary inclusive of dearness allowances is Rs 25,000 per month is in receipt of HRA of Rs 14,000 per month. He also pays monthly rent of Rs 10,000.
The extent to which the HRA shall be exempt shall be Rs 7,500 being least of the following:
- HRA actually received Rs 14,000
- 50 per cent of salary is Rs 12,500
- Rs. 7,500 being rent paid beyond 10 per cent of salary (rent actually paid Rs 10,000 - 10 per cent of salary Rs 2,500 = Rs 7,500)
So out of Rs 14,000 of HRA received only Rs 7,500 shall be exempt and the balance of Rs 6,500 shall be taxable. The above working shall be done for the number of months for which the employee has paid the rent.
Persons who are paying rent but not in receipt of any HRA
Section 80GG of the Income Tax Act grants tax benefits to the people who though are not in receipt of any HRA are still paying rent for the house occupied by them. This provision applies to the employed as well as self- employed persons. A person shall be allowed the deduction in respect of the rent paid by him, which is in excess of 10 per cent of his total income. However the actual amount of deduction i.e. excess of rent paid over 10 per cent of your total income should not exceed in case 25 per cent of your total income. However, in case the deduction so calculated exceeds Rs 2,000 per month then the amount of deduction shall be restricted to only Rs 2,000 per month,
Let us understand this with another example
The rent paid is Rs 60,000 for the whole year and the total income of the person is Rs 2,50,000.
He will be entitled for a deduction of Rs 24,00 being least of the three calculated as here under:
- Rs 35,000( i.e. excess of rent paid over 10 per cent of total income 60,000-25,000)
- Rs 62,500 (25 per cent of total income)
- Rs 24,000 ( Rs 2,000 per month)
As compared to the benefits available to people who are in receipt of HRA the benefit offered to people who are actually not in receipt of any HRA is very insignificant which in my opinion is very unjust. The restriction in terms of absolute entitlement of Rs. 2,000 per month needs to be revised upwardly as the same was fixed in April 1998 and the rentals and real estate prices have since gone up manifold.
Tax treatment of rent received
After having discussed the tax treatment for rent paid by you in respect of house property occupied by you, now let us understand the tax treatment when you receive the rent in respect of the property owned and let out by you.
In case you own a property and have let it out, the rent received by you is taxable under the head “Income from house property”. However, before such income is calculated you are allowed two items to be deducted from the rent received. The first deduction is a fixed 30 per cent of the rent received by you. The second deduction is in respect of interest paid by you on loan taken for the purpose of acquiring, constructing or repairing, renovating the house property. There is no restriction on the amount of deduction that is available to you in respect of the interest paid on loans for such properties. The deduction shall be available in respect of the interest payable for the year in respect of the loan taken for the property. The deduction of interest is available even if you have borrowed the money from your relatives and friends and not necessarily from any bank or housing finance company.
I hope you have understood the tax treatment for rent paid and rent received.