If you are a salaried individual, chances are you might have heard about the term HRA deductions before. HRA or House Rent Allowance deductions are based on the basic wage, HRA obtained, and the amount of rent paid. Salaried workers strive to take advantage of the HRA deduction since it significantly decreases taxable income. Nevertheless, the incentive may be accessible only if you rent a property or a piece of a property that you do not currently own and pay rent for residing in the leased housing.
Many individuals try to establish that they are actively paying rent sums to a member of the family in whose identity the residence is registered in order to qualify for HRA deduction tax benefits. Some salaried men have registered their property in the spouse’s name in order to obtain a reduced home loan interest, pay a reduced registration fee, and qualify for HRA deduction by demonstrating rent is paid to their spouse.
Let’s look into the tax regulations to see if this rent-to-spouse plan is permissible.
When you can claim HRA exemption in this scenario?
Individuals can legally claim HRA exemptions in rent-to-spouse scenarios if only the following conditions are fulfilled.
- Rent needs to actually be paid with proof:
HRA is a taxable allowance that an employer provides, to reimburse the actual rental amount paid by the employee on accommodation. If you are renting a property, you must pay rent to the property owner and produce acceptable proof of the payment made. Simply declaring and submitting rent receipts without transferring money is insufficient and illegal proof to seek HRA deduction.
So, the first requirement to seek HRA deduction is that you need to actually pay rent to your spouse.
- Your spouse must own the property you are renting:
The individual receiving the rent amount and leasing out the property must own the residence. As a result, the house rented by you needs to be inherited or purchased by your spouse. As per IT Act Section 27, a person who transfers any home estate to a spouse for any reason other than appropriate payment, or even to a minor kid who is currently not married, is presumed to be the proprietor of the transferred house property. Furthermore, the marriage of a man and woman is not regarded as a commercial relationship.
As a result, if you transfer a house to your wife or husband and register the same without due care, it will be viewed as a present, and any revenue from the property will be added to your taxable income. Thus, if you live in such a place while claiming to pay appropriate rent amounts to your spouse, that rental income will be included in your annual taxable income. This will allow you to obtain an HRA deduction, but chances are you may end up paying extra tax since the HRA deduction amount cannot exceed the amount of rent paid or received by your spouse.
- The rented accommodation cannot be shared:
If you demonstrate that you are currently paying rent for a house, there needs to be a whole house or a section of a property with a clearly marked area where you are residing on rent. It should be mentioned that you are legally permitted to pay the rent amount to your spouse even if he or she is a joint owner of the rented home. The only difference is that your spouse can only earn rent for the share of the property that he or she owns. For instance, if your wife holds ownership of 50% of the rented property, she is only entitled to 50% of the entire market rent amount for that home.
In rented housing, a renter cannot share living areas with the owner. So, if you and your spouse are residing in the same place, you cannot seek HRA deduction.
So, to sum everything up, in the rare event that the following requirements are met, you can claim an HRA deduction on the amount of rent paid to your spouse:
- The residence needs to be your spouse’s purchased or inherited property.
- You must be paying rent at your spouse’s property without sharing living space.
- You need to actually pay rent amounts to your spouse with acceptable legal proof.
How to calculate HRA deduction?
Anyone can calculate their respective HRA deduction amounts if they know their basic salary amount, House Rent, and Dearness Allowance value.
The amount you will receive as HRA deduction will be the lowest of the following amounts:
- The actual amount that is offered as House Rent Allowance by the employer.
- 40% of the amount of Basic Salary plus Dearness Allowance amount. (In case of the rented property being in any of the metro cities in India, the amount will be 50% of the amount of Basic Salary plus Dearness Allowance amount.)
- 10% of the amount of Basic Salary plus Dearness Allowance amount subtracted from the actual amount paid as Rent.
House Rent Allowance is an amount a company employer allows an employee as reimbursement of rented accommodation in their home city. HRA deduction is a benefit extended to the salaried individuals on behalf of their employers. In order to avail of this benefit in genuine cases, taxpayers must produce a rent agreement or utility bill in the name of the spouse – and only then HRA benefits can be claimed as per the tax norms. If you are looking to seek the deduction under a rent-to-spouse condition, make sure you are following the above-mentioned points to avoid legal problems in the future.