Section 80GG — Deductions on Rent Paid

In general, the House Rent Allowance or HRA is a component of the salary of an individual, and the individual can claim tax deductions on the HRA if they are living in a rental property and paying monthly entails.

However, sometimes the individual does not receive HRA from the employer but has to make payments towards the monthly rentals of their unfurnished or furnished living accommodation, which they currently occupy. In such cases, the individual could claim for deductions, as per Section 80GG of the Income Tax Act, 1961, on the amount paid towards monthly rentals.

The taxpayer has to, however, fulfil a few conditions to become eligible for tax deductions under Section 80GG.

Eligibility condition for deductions under Section 80GG 

The list of conditions to become eligible for tax deductions under Section 80GG of the Income Tax Act are as follows:

• The taxpayer should be salaried or self-employed.
• The taxpayer has not received HRA, as a part of the salary or earnings, at any given time during the financial year, for which they are claiming 80GG deductions. The HRA must not be a part of the salary to claim 80GG income tax deductions.
• The taxpayer or spouse or minor children or Hindu Unified Families (HUF) of which the taxpayer is a member, must not own a residential house property at the current location of performing office duties, or employment, or profession, or conducting business.  
• If the taxpayer owns a residential property, and the income or earning form this house property has been calculated as per applicable sections of income tax as self-occupied house property, then no deductions under Section 80GG shall be granted to the taxpayer.

Deductions under Section 80GG

The individual needs to file Form 10BA along with payment details of the monthly rentals to apply for tax deductions under Section 80GG.

The lowest value out of the following will be considered for 80GG deductions on the monthly rentals:

• ₹5000 every month or ₹60,000 per year
• 25% of the total salary income, or earnings  (excluding short-term and long-term capital gains as per Section 111A, income under Section 115D or 115A, deductions under 80C-80U, the actual income before making the deductions under Section 80GG)
• Actual rent paid is less 10% of total salary

Exceptions under Section 80GG

• The taxpayer could not claim deductions on monthly rentals under Section 80GG if they own a house property in the same location where they are staying on rent, or run a business, or are employed.
• The taxpayer cannot claim 80GG deductions as monthly rental payments for staying in self-owned house property.
• If the taxpayer owns a house property in a particular city and is working and staying in a different location, then the taxpayer cannot claim for 80GG deductions on their monthly rental payments, as their owned property would be considered as rented and generating income.
• If the taxpayer is living with their parents in their parent’s house, then they can claim directions on monthly rental payments as per Section 80GG. However, the taxpayer has to get into a rental agreement with their parents to avail the tax deduction. The father or mother who owns the property has to show this rent as income while filing their income tax returns.
• If the taxpayer is the joint owner of the house property with their parents, then they are not eligible to claim deductions under Section 80GG.

How to calculate tax deduction under Section 80GG

Example 1: 

Ravi earns a total annual income of ₹5 lakhs (after all the deductions) and is staying in a rented property and not getting any HRA or House Rent Allowance. He pays a total annual rent of ₹1.5 lakhs. In this case, the lowest value out of the below-mentioned conditions would be considered for deductions:

Condition 1: ₹5000 every month, which amounts to ₹60,000 per year.

Condition 2: 25% of total income = ₹1.25 lakhs. 

Condition 3: The rental paid minus 10% total income i.e. ₹1.5 lakhs –  ₹50,000 = ₹1 lakh

Therefore,  condition 1 has the lowest amount. Thus, Ravi can apply for tax benefits as per the amount in condition 1.

Example 2:

Ravi earns a total annual income of ₹3 Lakhs (after all the deductions) and is staying in a rented property and not getting any HRA or House Rent Allowance. He pays a rent of ₹6000 every month and the total annual rent of ₹72,000. In this case, the lowest value out of the below-mentioned conditions would be considered for deductions:

Condition 1: ₹5000 every month, which amounts to ₹60,000 per year.

Condition 2: 25% of total income = ₹75,000. 

Condition 3: The rental paid minus 10% total income i.e. ₹72,000 –  ₹30,000 = ₹42,000

In this case, condition 3 has the lowest value, and therefore, Ravi qualifies for tax benefits as per the condition 3.