Claim Tax Deduction on HRA for Two House: Submit proof of both rented properties to avail tax deduction on HRA for both houses.
House Rent Allowance (HRA) is a type of compensation provided by the employer to an employee to cover their living expenses. The HRA received by an employee is considered a part of their taxable income, and the employee can claim tax deductions on HRA under section 80GG of the Income Tax Act.
Calculation of HRA
The calculation of HRA is based on several factors such as the employee’s basic salary, the rent paid by the employee, and the location of the house. The HRA received by an employee is the least of the following:
Rent Paid – 10% of Basic Salary
40% of Basic Salary (for those living in metropolitan cities)
50% of Basic Salary (for those living in non-metropolitan cities)
Benefits of Calculating HRA
House Rent Allowance calculation is a common component of salary packages offered by employers to their employees to cover the cost of renting a house. The calculation of HRA is an essential aspect of an individual’s financial planning as it can help in reducing the taxable income and ultimately lower the amount of tax that needs to be paid.
Here are some of the benefits of calculating HRA:
- Tax Savings: HRA is exempt from tax, up to a certain limit, as per the provisions of the Income Tax Act. Calculating HRA accurately can help an individual in reducing their taxable income and save taxes.
- Budgeting: HRA calculations help in determining the amount that can be set aside each month for housing expenses. This can help in budgeting and managing finances more efficiently.
- Proof of Expenses: Calculating HRA provides proof of housing expenses, which can be used while filing taxes. This can help in avoiding any discrepancies that may arise while filing tax returns.
- Improved Cash Flow: By calculating HRA, an individual can determine the amount of money they need to set aside each month for housing expenses. This can improve the cash flow and help in managing finances more efficiently.
- Increased Savings: By saving on taxes, an individual can increase their savings, which can be used for various other purposes, such as investments, emergency funds, etc.
Claiming Tax Deduction on HRA for Two Houses
In some cases, employees might have two houses – one in their hometown and one in the city where they work. In such cases, they might receive HRA for both houses. In such situations, the employee can claim tax deductions on HRA for both houses. However, they need to keep in mind the following points:
- Rent Paid: The employee must ensure that the rent paid for both houses is reflected in their rental agreement. They must also have proof of the rent paid for both houses.
- Basic Salary: The basic salary used for the calculation of HRA must be the same for both houses.
- Location of the Houses: The location of both houses must be considered while calculating the HRA. For example, if one of the houses is located in a metropolitan city and the other in a non-metropolitan city, the calculation of HRA for both houses will be different.
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Consequences of Not Calculating HRA
There can be various consequences of not calculating HRA accurately, including:
- Overpayment of Taxes: If an individual does not calculate HRA accurately, they may end up paying more taxes than they actually owe. This can result in an overpayment of taxes, which may be difficult to recover.
- Tax Discrepancies: Not calculating HRA accurately can lead to tax discrepancies while filing tax returns. This can result in tax notices and penalties, which can be time-consuming and stressful to resolve.
- Loss of Exemptions: HRA is exempt from tax up to a certain limit, as per the provisions of the Income Tax Act. Not calculating HRA accurately can result in a loss of tax exemptions and higher taxable income.
- Poor Financial Planning: HRA calculations help in determining the amount of money that needs to be set aside each month for housing expenses. Not calculating HRA accurately can result in poor financial planning and mismanagement of finances.
- Increased Stress: Tax-related issues can be stressful, and not calculating HRA accurately can lead to additional stress and anxiety, especially during tax filing season.
Steps to Claim Tax Deduction on HRA for Two Houses
- Determine the Rent Paid for Both Houses: The employee must determine the rent paid for both houses.
- Calculate the HRA for Both Houses: The employee must calculate the HRA for both houses based on the rent paid and their basic salary.
- Submit the Rent Receipts: The employee must submit the rent receipts for both houses to their employer.
- Claim the Tax Deduction: The employee can claim the tax deduction on HRA for both houses while filing their income tax return.
Conclusion
Claiming tax deductions on HRA for two houses can be a complicated process. However, by keeping in mind the points mentioned above, the employee can claim the tax deduction easily. The employee needs to keep all the necessary documents and receipts to avoid confusion during the calculation of HRA and the claim process. The calculation of HRA plays a crucial role in determining the number of tax deductions an employee can claim. Hence, we at Vakilsearch are here to help you with the seamless process that best suits your requirements.
FAQs
1. Can HRA be claimed if the rent is paid in cash and there are no formal rent receipts?
Yes, HRA can be claimed even if the rent is paid in cash, but it's essential to have proper documentation. Obtain a rent agreement and a declaration from the landlord to support your claim. Additionally, ensure that the landlord’s PAN is provided if the annual rent exceeds Rs. 1 lakh.
2. Is there a limit to the number of times one can claim HRA tax deductions if frequently relocating between multiple houses?
There is no specific limit on the number of times HRA can be claimed due to frequent relocation. However, accurate and complete documentation for each rental period is necessary. Ensure you maintain all rent receipts and updated rental agreements for each new residence.
3. What are the implications of subletting one of the rented houses on HRA claims?
Subletting a rented house can complicate HRA claims, as it may indicate that the rent is not solely for your accommodation. If you sublet, it is crucial to clarify the arrangement and maintain clear records to avoid issues during tax assessments.
4. How does co-sharing a rented house affect individual HRA claims?
Co-sharing a rented house does not affect individual HRA claims, provided each tenant has a separate rent agreement. Ensure that the rent receipt specifies each tenant's share of the rent and that the payment is made from individual accounts.
5. Can HRA and home loan benefits be claimed simultaneously if one owns a house but resides in a different rented house?
Yes, HRA and home loan benefits can be claimed simultaneously if you own a house but reside in a different rented house. You need to demonstrate that your owned property is not suitable for residence due to location or other valid reasons.
6. What documentation is required to prove occupancy in two different rented houses for HRA claims?
To prove occupancy in two different rented houses, you need separate rent agreements, rent receipts, and proof of rent payments for each house. Additionally, provide a declaration explaining the necessity for dual occupancy, supported by relevant evidence.
7. How to handle discrepancies in rent agreements and actual payment while claiming HRA?
To handle discrepancies in rent agreements and actual payments, ensure that all records are accurate and updated. Keep a clear record of rent payments, either through bank statements or receipts, and amend the rent agreement if necessary to reflect the correct terms.
