Some individual pay the rent for living but they don’t receive HRA from their salary, hence they don’t qualify for HRA exemption to be claimed hence, the income tax has introduced section 800GG of Income tax act, 1961 so that these individuals can also take benefit of the rent paid and reduce their tax payment. In this article we will discuss about section 80GG of Income Tax Act, 1961 and how the taxpayer can maximize the deduction under this section.
Table of Contents
What is section 80GG of Income Tax Act, 1961?
Section 80GG of the Income Tax Act, 1961 Act gives deduction to those individuals who do not receive and qualify for house rent allowance from the employer however they pay rent for their residential place. This section attempts to relieve all such people who are not able to take the benefit of the cost of housing through HRA exemption.
Who can claim deduction under 80GG?
You are required to fulfill the cumulative conditions to claim the deduction under Section 80GG of income tax act, 1961:
- Individuals: This section applies only to individual taxpayers whether they are salaried or self-employed. Companies or firms are not eligible to take deduction under Section 80GG.
- HRA Not received: You can claim the deduction under this section if you have not must HRA as part of your salary from your employer.
- Rented House: Living in a rented house is mandatory to claim deduction under this section. If you have your own house in the same city where you work, then you cannot claim this deduction.
- Actual Rent Paid: Actual rent payments for rented house is also mandatory. If you live with parents who are actual owner of the property and pay them rent as per the rent agreement signed with them, you also can claim the deduction under this section.
Amount eligible for deduction under section 80GG
The amount of deduction under Section 80GG is the lower of the below amounts:
- 25% of adjusted total Income during the year
- Actual rent paid less 10% of adjusted total income
- ₹60,000 per year (fixed amount, irrespective of your income or rent payments)
Important tips to maximize deduction under Section 80GG
Here are important some tips through which you can increase your deduction under section 80GG of Income tax act, 1961:
- Proper Records: you need to maintain the records of the rental agreements, rent receipts, and any other documents related to your rent payments which may be useful for filing of tax return.
- Lower Rent: You should negotiate for lower rent with landlord so that this may directly reduce the rent payments which increase your deduction.
- Annual Rent Payments: You should try to pay rent in advance if landlord agree with this which can help you claim a higher deduction for the year. However you need to make sure about the financial resources for such an advance payment.
- Living with Parents: If you are living in a property with your parents who are the real owner of this property with a proper signed agreement, then you may be eligible to claim deduction under this section, however these rent payments will be considered as income from house property in the hands of your parents.
- Tax Regime: Section 80GG is applicable only if you choose the old tax regime. If you have opted new tax regime, you cannot claim deduction under section 80GG of Income Tax Act, 1961.
Difference between HRA and Section 80GG of Income Tax Act, 1961
| Parameters | HRA Exemption (House Rent Allowance) | Deduction Under Section 80GG |
|---|---|---|
|
Purpose
|
It reduce the taxable income through allowance provide by employer |
It reduce the taxable income through deduction claimed during filing of tax returns
|
|
Eligibility |
It applies if HRA is given by employer as a part of salary |
It applies if HRA is not given by employer and the employee is residing in a rented house |
|
Calculation of exemption or deduction
|
Calculation of exemption or deduction
|
It is formula based on rent paid, salary, type of city (metro/non-metro), and type of house (owned/rented).
|
|
Applicability |
It is applicable for salaried individuals only. |
It is applicable for salaried and self-employed individuals |
|
Documentation |
Salary slips showing HRA, Rent receipts, rent agreement, these are submitted to employer |
Rent receipts and rent agreement, these are not submitted to anyone, however should be kept safely for future records. |
|
Benefits |
It cannot be claimed with deduction u/s 80GG |
It cannot be claimed if HRA is claimed
|
Final Words
Section 80GG of income tax act, 1961 provides the valuable tax relief for individuals who pays rental expenses and are not eligible for HRA exemption. Hence, understanding the conditions of eligibility, calculating the amount of deduction, and maintaining the proper records can increase your tax savings.
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Frequently Asked Questions (FAQ)
Adjusted Total Income means gross total income for the financial year with the below inclusions and exclusions.
Inclusions:
- Salary
- Business income (if you are self-employed)
- Short term capital gains
- Income from other sources
Exclusions:
- Long-Term Capital Gains
- Agricultural Income
- Deductions under other sections (except 80GG)