Income Tax laws allows you to declare amount paid for rental properties to be considered under tax exemption and enables you to claim tax refund for the same. This is applicable for both salaried as well as business people. This is commonly known as HRA exemption and there is different provision for HRA exemption for different income groups. Let’s see in detail.
HRA Exemption for a Person carrying a Business or Profession
If you are using rented property for the purpose of your business, you can claim HRA exemption. It can be a commercial property like an office, a factory or a warehouse. The matter of the fact is such properties taken on rent comes under “business expenditure”, hence the expenses made are exempted for income tax. Furthermore, any expenses incurred related to such a property, such as municipal/authority taxes, repairs or renovation made are also claimed for tax exemption against your business income.
Talking in relation to IT audit perspective, you are eligible to deduct tax at source at a rate of 10% of the rent exceeding INR 1.80 lakhs in a year, if the turnover is in excess of INR 1 crore in case of business and INR 50 lakhs in case of profession.
HRA Exemption for Salaried Employees
House rent exemption for salaried employees is popularly termed as HRA allowance. However, the exemption is subject to fulfillment of certain conditions and up to a set limit. The first and foremost consideration to availing HRA allowance is that you actually should be paying for the residential accommodation you have declared for tax exemption. The property for which you are claiming the exemption should not be owned by you. Similarly, you cannot claim exemption of the rent paid by you for an accommodation occupied by your parents.
Interestingly, there is another provision exists which allows the employee to claim HRA exemption where the employee has let out his property to the employer and the employer, in turn, lets it back to the employee. This is possible, under the argument that the employer gets full deduction for the rent paid to the employee and the employee too gets the HRA exemption on such rent received by him for his own property.
Maximum Exemption under HRA Allowance
There is a certain limit allowed on HRA for tax exempt. It should be the lowest of the following three items:
- The actual value of HRA received
- Amount of rent paid that exceeds 10% of your salary
- Maximum of 50% of your basic salary, if you are residing in Metro cities and 40% in case of non-metro cities
For Self-employed or those who are not in Receipt of HRA
Self-employed and a few sections of salaried people are not allowed HRA exemption for the rent paid for residential accommodation occupied by them. Section 80 GG provides tax relief to all such people by allowing a flat deduction at a rate of INR 5000 per month, which is subject to a maximum of 25% of the total taxable income.
So, this is how you can avail benefit of tax refund on the rent paid for the financial year 2017-18.