As the real estate prices in metro cities continue to remain high, many salaried individuals either prefer or are compelled to stay in rented houses. Many are postponing their decisions to purchase a house, given the increasing interest costs. In such cases, tenants should know the tax exemptions they can avail of by staying on rent.
Let us take an example. Abhijeet Khanna, a management graduate working with a multi-national company in Mumbai, recently got married to Khyati, a doctor. Khanna earns an annual basic pay of Rs 10 lakh. In addition, he is paid a House Rent Allowance (HRA) amounting to Rs 3.5 lakh and city compensatory allowance of Rs 1.5 lakh. Khanna does not own a house. However, Khyati is a doctor earning a net salary income of Rs 7.5 lakh plans to purchase one, for which she is considering taking a bank loan of Rs 60 lakh at an interest rate of 10 per cent.
Are there advantages of buying the property in Khyati's name? Should Khanna rent a flat or stay in the flat to be purchased by Khyati and pay her rent of Rs 3 lakh per annum? Will Khanna stand to gain if he pays rent to his own wife?
There are certain taxes that Khanna can save in such a situation, subject to certain conditions.
House rent allowance
Most salaried people receive HRA as part of the compensation structure. A salaried taxpayer is eligible to claim HRA exemption under section 10 (13A) of the Income-tax Act, 1961 in respect of a residential accommodation occupied by him, except where the same is owned by him or he has not actually incurred the rent expenditure.
Accordingly, an HRA exemption is available for least of the following amounts:
- Actual HRA amount received from the employer;
- The amount of rent you pay for your house in excess of 10 per cent of your basic pay; or
- 50 per cent of basic pay if you reside in a metro city and 40 per cent of basic pay for non-metro cities.
In a recent judicial precedent of Bajrang Prasad Ramdharani v/s ACIT, the Ahmedabad Income-tax Appellate Tribunal held that the exemption of HRA to the taxpayer husband was available for payment to his wife, who was the landlord and lived in the same house. In its decision, the Tribunal highlighted that for granting a claim of exemption, only use of the house by the taxpayer and payment of rent was mandatory.
The wife can also claim deduction up to Rs 1.5 lakh towards payment of interest on the housing loan taken for a self-occupied property. However, where the property is let out as in the present case, entire interest paid would be allowed as a deduction.
While the savings on tax can be substantial, Khanna and his wife have to keep some things in mind:
- The income-tax slab and rate applicable to the landlord spouse should be lesser than the tax rate applicable to the tenant to enjoy a tax advantage
- The rental income should be appropriately reported in the tax return of the landlord spouse
- Income earned by the landlord spouse must not qualify for clubbing with the tenant spouse under the relevant income-tax provisions. Even for wealth tax, wealth acquired by the wife from assets transferred by her husband could be clubbed with the wealth of the husband. Therefore, the wife must make personal contributions to acquire loans towards the purchase
- Banks insist registration of the property in the name of the person applying for the loan and demonstrating capability of discharging the monthly instalments
- Appropriate documentation in terms of a proper rent agreement, rent receipts, bank accounts, etc must be maintained to reflect the independence and real nature of the transaction
- Where the husband incurs business debt or loss, a house registered in the wife's name cannot be attached to cover the loss