How the Income-Tax Act treats rent

“A healthy writer is an oxymoron,” I said early in the morning, quoting Paul Theroux from his latest book Ghost Train to Eastern Star.

“Ah. You and your need to justify your weaknesses using philosophy. Look at the tyres that have developed around your stomach. Do something about it. Come on, get up,” she said, pulling my arm and trying to get me out of bed and go out for a run.

“Oh, that reminds me, did you pay the rent to the landlord?” I asked, trying to deviate her mind from the issue at hand.
“I did. I always do.”
“Good. But did you get a rent receipt?”

“Oh no! I forgot to do that. But will take it the next time I go to meet him.”

“Hmmm. And don’t forget because you’ll need the receipt.”
“But why would I need that receipt?”
“Because it is proof of you having paid the rent.”

“And? I mean our landlord knows I have paid him the rent. And he is a nice man. I don’t see him coming here tomorrow morning and asking me to pay again!”

“Yes, dear, but the thing is, you can claim a tax deduction and lower your taxable income against the rent you pay. And for that you need proof. As per the Income-Tax Act, if the rent being paid is greater than Rs 3,000 per month, you need to submit either a copy of the rent receipt issued by your landlord or a copy of the house lease agreement. These proofs need to be submitted to the company you work for, so that they can take it into account while calculating your taxable income for the year and deduct taxes accordingly.”

“Okay. So I guess then we don’t need the rent receipts because I already have the house lease agreement. And by next Thursday, I need to submit the proofs for all the tax deductions that I am claiming, so I’ll submit a copy of the lease agreement,” she said in a stern voice hinting that I look at the complete picture before I make a fuss about things.

“Yeah. I kind of forgot that there was a lease agreement as well,” I tried to explain, rather sheepishly.
“Kind of forgot? What’s that supposed to mean?”
“Okay, I forgot.”

“Good. But tell me, will my deduction be equal to the amount of rent I pay for this place?” she asked, reminding me who was the boss, given that I had just parked myself into what was essentially her house.

“The Income-Tax Act is not as simple as that, dear. This deduction is allowed under Section 10(13A) of the Act and is limited to a minimum of: 1) The actual house rent allowance (HRA) that you get; 2) the actual rent paid, less 10% of salary — where salary includes the basic salary plus the dearness allowance; 3) 50% of the salary if the rented house is situated in Mumbai, Chennai, Kolkata and Delhi and 40% of the salary in any other case.”

“Do you expect me to understand that?”

“Sorry, let me explain using numbers. You pay a rent of Rs 15,000 per month and the company pays you a house rent allowance of Rs 20,000 per month. Your basic salary is Rs 40,000 per month, and as far as I know, you do not get any dearness allowance (DA). Hence your salary is Rs 40,000 (basic + DA). So the first part of the formula is the actual HRA you get, which is Rs 20,000. The second part is the actual rent paid less 10% of salary. The actual rent paid is Rs 15,000. And 10% of salary works out to Rs 4,000 (10% of Rs 40,000).

So the rent paid, less 10% of salary, works out to Rs 11,000 (Rs 15,000 -  Rs 4,000). The third part of the formula is 50% of the salary, since we live in Mumbai. This works out to Rs 20,000 (50% of Rs 40,000). So the three numbers that we get are Rs 20,000, Rs 11,000 and Rs 20,000. The minimum of these of course is Rs 11,000 per month. Multiply that by 12 and it comes to Rs 1.32 lakh, and that is the deduction that you will get against the rent you pay.”

“But that’s not fair!” she exclaimed. “I mean, I pay a rent of Rs 15,000 per month or Rs 1.8 lakh per year!”

“Well that’s the way it is. So what that means is that against your HRA of Rs 20,000 per month or Rs 2.4 lakh per year, you will get a deduction on only Rs 1.32 lakh, the remaining Rs 1.08 lakh (Rs 2.4 lakh - Rs 1.32 lakh) will be added to your income for the year and taxed.”

“Damn!! But tell me, what if my company structure did not have an HRA component built into it. What happens then?”

“Then we refer to Section 80GG, which allows you to make a deduction on rent paid in excess of 10% of your total income on condition that it is not more than 1) 25% of your total income 2) Rs 2,000 per month, whichever figure is lower. Now in your case, it is very clear that Rs 2,000 per month is a lower number. In fact, even for people living in small cities, Rs 2,000 per month is a very small deduction, given that rents are much more than that. So if HRA is not a part of your salary structure, you really lose out as far as the tax deduction is concerned.”

“But tell me, if I had been staying with my parents, could I have paid them a rent and claimed a tax deduction against it?”

“Yeah, you can pay a rent to your parents and claim a tax deduction. I am sure the next thing you would want to ask is ‘Can one pay a rent to one’s spouse and claim an exemption for it?’ Well, the answer is no. The logic being that a husband and wife are supposed to stay together.”

“What about couples who live in? What if one of them owns the house and the other pays rent to him or her? Can that be claimed as a deduction?” she asked with a wicked smile on her face.
“Well as far as I understand, in such a situation a deduction can be claimed.”

“So? Let me buy this place. And you pay me a rent! How about that?” she asked, having the last laugh.
(The example is hypothetical)