Everything you ever need to know about House Rent and Income Tax

One of the biggest points for confusion for most of us is about the Income Tax Aspects surrounding our House. Whether you live in a rented house or own a house that is rented out, there are significant Income Tax Implications. The purpose of this article is to explain these topics and clear things for you.

For People Living in Rented Homes:

If you live in a Rented House you are eligible for something called House Rent Allowance and this has tax benefits. If you check out your salary package closely, the will be something called "HRA" or "House Rent Allowance" that is part of your monthly salary along with other components like Basic Salary, Provident fund etc. If you dont have HRA as part of your salary, you need to discuss with the finance department of your office and make sure to allocate a decent chunk of your salary into the HRA Bucket.

Lets assume you have HRA as a salary component. So the next step is to calculate the taxation aspect of the HRA Component. In order to do this, you need the following:

1. Your Basic Salary

2. The Actual HRA Component in your Salary

3. The Actual Rental paid every month

4. Whether you live in a Metro or a non-metro

Once you have these details, try to calculate the following numbers:

1. If you are in a Metro - take 50% of your Basic salary and if not, take 40% of your Basic Salary

2. The Actual monthly HRA component from your salary

3. The Actual Rent paid - 10% of your Basic Salary

Of these 3 figures whichever is the least is your eligible tax deduction against HRA.

For ex: If your Basic Salary is Rs. 40,000 per month and you live in Chennai. Your actual rent paid every month is Rs. 20,000 and the HRA Component in your salary is Rs. 22,000. In such a case, how will you compute HRA?

1. Since you are in Chennai (Metro) you get = Rs. 20,000

2. Monthly HRA Component = Rs. 22,000

3. 20,000 - 4000 (10% of 40,000) = Rs. 16,000

So, among these 3 components, Rs. 16,000 is the least and hence you can claim HRA Exemption of Rs. 16,000 every month. This means Rs. 1,92,000/- will be deducted from your total annual income for tax calculation. So, lets assume your total annual salary was Rs. 7.5 lacs, after considering the tax deduction for HRA your net taxable salary is only 5.58 lakhs.

Some Questions from People Living in Rented Homes:

After reading the above example, I am sure you will have many questions. I have tried to answer some of them below:

1. Can I claim HRA if my own house is still under construction?

Yes, you can. As long as you are paying a rent to someone (and have proof for the same) you can claim HRA

2. My house owner doesnt give me any receipts. What can I do?

A simple rental agreement written on white paper and signed on a Rs. 1/- revenue stamp affixed in the letter should suffice. The actual rent paid and the person to whom it is paid must be clearly mentioned in the letter.

3. My owner is refusing to sign the agreement. What can I do?

Your owner is refusing because if he signs this agreement, he needs to show this as income for his taxes and hence is trying to escape. You need to explain to your owner before you occupy the house that you wont take the place unless he signs the rental agreement. If he doesnt sign, you cant get tax benefits even though you are actually paying the rental money

4. I am a bachelor. Can I show as if I am paying rent to my mom or dad?

Sure you can. However, your mom or dad will have to show this rent you are paying as an income for their taxation purposes.

5. My wife is a house wife. Can I show as if I am paying rent to my wife?

No, you cannot pay rent to your spouse. It is not allowed as per Indian tax laws.

6. Can I Pay Rent to my Mom or Dad and claim HRA Benefits?

This is a tricky question. Legally there is nothing stopping you from doing this but this is a concept that is frowned upon because effectively this amounts to cheating. In real life - would we really pay rent to our mom or dad? 

Anyways, if you insist on going this route, you need to understand that if your tax returns get audited in future, you would have to answer the tax officials on why you claimed as if you are paying rent to your own parents plus prove that you actually paid rent. Otherwise - the penalties you will pay and the consequences would be much worse than the few thousand rupees of tax you will save. 

If you wish to go this route - as a first step, you would need to apply for a PAN Card for your mom or dad (on whoever's name you want to pay rent). Only the person on whose name the house is registered can receive rent. If your father is employed and owns the house but you want to show rent to your mom who is a house wife - that is not allowed. After this you would have to sign a rental agreement on stamp paper and register the same for the amount of rent that is nominal for your area plus the size of your room. Once done, you must make sure to formally transfer the rent to your parents account plus ask them to issue a rent receipt so that you can use the same for tax filing purposes. 

For People who Own a House that is Rented Out

If you are someone who has rented out your house, you need to show that rent as an income along with your other sources of income. The taxation of your rental income depends on whether you have a loan running against this rented house or you own it fully. The amount that is considered for taxation could either be the Notional Rental for that area or your Actual Rent whichever is higher.

Option 1: Owned fully

In this case, if you receive a rent, 70% of the rent must be shown as income in your records. For ex: If your monthly rent is Rs.20,000/- you can deduct 30% of it as expenses incurred in maintaining the house & other charges. The remaining Rs. 14,000/- you need to show in your income.

So, let us say your annual salary is Rs. 5 lakhs from your employment, your total taxable salary will be Rs. 6,68,000/- (After including 1,68,000 of Rental Income)

Option 2: Have a Home Loan Running

In this case, the interest component of your loan is totally deductible from the rent you receive. Let us go back to our above example. You are receiving a rental of Rs. 1.68 lakhs as income. In case a home loan is running for this house where the interest you paid last year was Rs. 1.18 lakhs, you can deduct this from the rental income and show only Rs. 50,000/- as the net income because technically you are offsetting the interest & your rent.

Remember - You can only consider the interest component of your home loan EMI for this deduction and not the principal.

Nowadays, due to high property prices, in almost all cases, the interest amount far exceeds the rentals. Investors generally buy properties for the capital appreciation side of Investment and leave it out on rent so that the asset does not remain idle and is maintained properly.

Some Questions from People Owning Rented Homes:

1. What is Notional Rent?

Notional Rent is the guideline rental price that the government will consider for all its calculations. Technically this is the minimum price at which you are expected to rent out your house.

2. What if the Notional Rent is higher than the Actual Rent?

In the rare case that the actual rent you get is lower than the Notional Rent, you still need to consider the notional value for tax purposes. Remember the example above? In case your actual rent is only Rs. 15000/- whereas the Notional rent for your area is Rs. 20000/-, for all taxation purposes Rs. 20000/- only will be considered

3. My Rent this year was much lower than the Interest I am paying the bank on the home loan. Is there anything that can be done to help this situation?

Well, for rented properties, the entire amount of interest payable can be adjusted against the rent and any amount that is left over may be carried forward in the tax return as loss from property to the next year. This is very important from a tax planning point of view. Such carry forward of the unabsorbed interest can be done for a continuous period of eight years.

So, as years go by and the loan gets paid off, the interest component that is getting set-off against the rental income each year will keep on reducing. On the other hand, typically, the rent would tend to increase each year or at least once every 2-3 years. This will go on to lead to a positive differential between the rent received and the interest paid and this difference would be taxable. At this point, the carried forward interest will be extremely useful to reduce tax liability.

Remember - If you wish to carry forward loss, it is mandatory to file the tax return by July 31 (for individual taxpayers). Without filing the tax return by the due date prescribed this carry forward of loss will not be allowed.

4. This carry forward calculation seems complicated. What can I do?

Contact a tax advisor or a chartered accountant. They will charge you a small fee and do this for you without much hassle to you.

I hope this article answered all your major queries abut house rent from both the owners perspective and the tenants perspective. If you have any further queries, leave a comment below and I will try to answer them...