“80GG - Rent deduction for Self Employed”

By CA Maneet Pal
09810774806
http://www.capasricha.com/

80GG of Income Tax Act, 1961, is the most ignored section of Income tax Act, 1961 by the consultants and the taxpayers. This section is important as it provide leverage to self employed/ professional/ businessman/ or person who’s salary does not include the House Rent Allowance (HRA), to still claim the deduction under section 80GG.

To understand deduction u/s 80GG and its difference with HRA we would also need to understand the difference between “Exception and Deduction”. Both “exemption” and “deduction” actually deals with two different components eg: When we calculate the HRA exemption while deducing the taxable salary we exempt a portion of amount from the HRA and the exempted amount is NOT taxable also that taxable amount is subject to some specified conditions under the income tax act. And when calculate the rent deduction allowable under section 80GG of the act; we calculate the deduction which is deducted after we calculate the gross total Income.  The difference between exemption and deduction can be further taken up while understanding the concept of HRA u/s 10(13A) and Rent Deduction for self employed u/s 80GG.

What is HRA and how do you claim HRA? (Exemption)

HRA or House Rent Allowance is among the many benefits that an employer gives to his employees for rendering certain services to him. HRA is given by the employer to the employee to meet the expenses in connection with the rent accommodation which the employee might have to take. HRA is except u/s 10 (13A) subjects to the minimum amount of the following three conditions:

                     ·         Actual HRA received by the employee in respect of the relevant period.

                     ·         Excess of rent paid for the accommodation occupied by him over 10% of the salary for the ‘relevant period’.

                     ·         50% of the salary where the residential accommodation is situated at Mumbai, Chennai, Kolkata or Delhi and 40% of the salary where the house is situated at any other place for the relevant period.

Are you Self-Employed? You can avail this deduction! (Deduction)

If you’re a self employed professional/ businessman/ your salary does not include the House Rent Allowance (HRA) you can still claim the deduction under section 80GG. Now here comes the part where we talk about the deduction. In case of deduction the amount is first included in your Gross Total Income (GTI) and the later the deduction is allowed. Self employed citizens are entitled to tax deduction under section 80GG of the Income Tax act, 1961.

Now as we can see the core difference between the two, there are numerous people who have no idea about the deduction. There are certain conditions which are needed to be met to claim this deduction:

·         Quantum of Deduction

The deduction shall be the minimum of the following amounts:

(i)                  Excess of rent paid over 10% of the “Adjusted Total Income”;

(ii)                25% of the “Adjusted Total Income”;

(iii)               Rs.2000 per month.

·         Other Conditions

(i)                  taxpayer under no condition should be enjoying the benefit of HRA; and

(ii)                the taxpayer, his spouse or his minor child should not have any house in the same city where they reside to claim this deduction.

                                                                                                                                                                                                                                              

Few further more interesting things:

If you happen to reside with your parents in their house, you can pay them the rent. If the parent pays a lower tax or has no source of income then your tax liability can be considerably lower down.  Since Rs 2000 pm is the highest you can claim a month, you can’t go above that. But this 2000 pm can bring down your tax liability to good extent. To claim this 80GG deduction you need to submit a declaration on form 10-BA that you pay rent and are not receiving any HRA benefits.

Amount of deduction – something is better than nothing?

The maximum deduction under section 80GG that is provided by the Income Tax act, 1961 is actually very less to the current value of money. With the rising trends and the ever increasing standard of living the mere amount of Rs 2000 per month as a deduction is primarily close to nothing. There are people who pay house rent that ranges from 10000 pm to 50000 pm, here the deduction provided to the general public does not even suffice a months benefit. Therefore the government should make the necessary amendments for the same as the amount does not anywhere matches the current consumption and saving trends.