Rent is a big part of life for millions of people in India, whether you’re paying it as a tenant or earning it as a landlord. Luckily, the Income Tax Act, 1961, offers some helpful tax benefits and deductions that can make managing your rent easier.
In this blog, we’ll break down the key rules around rent—both paid and received—and show you how to save money by using the right deductions and exemptions. Whether you’re a tenant looking to claim HRA or a landlord trying to lower taxes on rental income, we’ve got you covered!
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1. Income Tax on Rent Paid by Tenants
If you’re a salaried employee living in a rented house, you can claim deductions on the rent you pay under certain conditions. There are two key provisions that offer tax relief on rent paid: House Rent Allowance (HRA) and Section 80GG.
A. House Rent Allowance (HRA)
HRA is part of your salary and is provided by employers to help cover rent expenses. The tax benefit is available only if you actually live in a rented house and pay rent.
How HRA is Calculated:
The deduction you can claim on HRA is the least of the following three amounts:
- The actual HRA received from your employer.
- Rent paid minus 10% of your basic salary.
- 50% of your basic salary if you live in a metro city (Delhi, Mumbai, Chennai, Kolkata) or 40% if you live in a non-metro city.
Important Points:
- You need to submit rent receipts to your employer to claim HRA deductions.
- If your rent exceeds ₹1 lakh annually, you must provide your landlord’s PAN details.
- If you don’t receive HRA as part of your salary, you can still claim rent deductions under Section 80GG.
B. Section 80GG: Deduction for Rent Paid (No HRA)
Section 80GG allows individuals who don’t receive HRA to claim deductions on the rent they pay. This is especially helpful for self-employed individuals or those whose employers don’t provide HRA.
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Eligibility Criteria:
- You must be living in rented accommodation.
- Neither you, your spouse, nor minor children should own residential property in the city where you live.
- You must not be claiming HRA deductions.
- How to Calculate the Deduction:
- The deduction under Section 80GG is the least of the following three amounts:
- ₹5,000 per month (i.e., ₹60,000 annually).
- Rent paid minus 10% of your total income.
- 25% of your total income.
2. Income Tax on Rent Received by Landlords
For landlords, rental income is taxable under the category “Income from House Property.” However, you can claim several deductions to reduce your tax liability.
A. Gross Annual Value (GAV) of the Property
Your rental income is calculated based on the Gross Annual Value (GAV) of the property, which is the higher of the actual rent received or the expected market rent. If your property is vacant for part of the year, the GAV is adjusted accordingly.
B. Deductions Available for Landlords
Under Section 24 of the Income Tax Act, landlords can claim the following major deductions:
i. Standard Deduction of 30%:
You can claim a 30% deduction on the net annual value (after deducting property taxes) of your property, regardless of the actual expenses for maintenance or repairs.
Example:
If you receive ₹3,00,000 in rent and pay ₹30,000 in property taxes, your net annual value will be ₹2,70,000. A 30% deduction on this amount (₹81,000) reduces your taxable income to ₹1,89,000.
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ii. Deduction on Home Loan Interest:
If you’ve taken a home loan to purchase or construct the rented property, you can claim a deduction on the interest paid. There is no upper limit for this deduction if the property is let out. This is in addition to the 30% standard deduction.
C. Vacant Property
If your property is vacant for part of the year, your GAV is reduced proportionally, which decreases your tax liability.
D. Taxability of Security Deposits
Security deposits from tenants are generally not taxable unless they are non-refundable or adjusted as rent. If adjusted, they become part of your rental income and are taxed accordingly.
3. TDS on Rent Paid by Tenants
If you’re a tenant paying more than ₹50,000 in monthly rent, you’re required to deduct Tax Deducted at Source (TDS) at 5% on the total annual rent.
Key Points:
- As a tenant, you’re responsible for deducting and depositing TDS with the government.
- You must file Form 26QC and issue Form 16C to your landlord.
- TDS is deposited once a year, not monthly.
4. Joint Ownership and Rental Income
If the property is jointly owned, the rental income is split based on each co-owner’s ownership share. Each co-owner can claim deductions under Section 24 for their respective share of the rental income.
Final Thoughts:
Whether you’re a tenant or a landlord, understanding the income tax rules related to rent can help you lower your tax burden and take advantage of available exemptions. Tenants can benefit from HRA and Section 80GG, while landlords can reduce their taxable rental income through deductions under Section 24. With proper tax planning, you can optimize your finances and make the most of these provisions.
