Govt's HRA Move To Push India's Rental Market

In the Budget 2016-17, Finance Minister Arun Jaitley has brought in a proposal under which he has raised the house rent allowance (HRA) claim limit. Under Section 80GG of the Income Tax (I-T) Act, individuals not getting HRA from their employers can claim deductions for the rent paid. The new Budget has raised the amount limit from Rs 2,000 a month to Rs 5,000 a month (from Rs 24,000 to Rs 60, 000 annually) and this will come into effect from April 1, 2017.

Tax exemption on the HRA received from the employer is specifically granted under Section 10(13A) of the Act, but Section 10 (13A) excludes people who do not receive the HRA component.

To claim deduction under Sec 80GG, you have to fulfill the conditions mentioned below:

Your rent spent should be more than 10 per cent of your total income. So, it is the actual rent paid, minus 10 per cent of the adjusted total income. 

You must be paying Rs 5,000 as rent every month.

Such deduction cannot exceed 25 per cent of the adjusted total income.

Illustration

A person earns a monthly salary of Rs 15, 000. Now, he spends Rs 3,500 towards monthly rent.

Under condition 1: Rs 3,500 – Rs 1,500 (10 per cent of Rs 15, 000) = Rs 2,000.

Under condition 2: Rs 5,000

Under condition 3: 25 per cent of Rs 15,000 = Rs 3,750

Now, the lesser of the three amounts has to be selected. So, Rs 2,000 will be available as deduction towards Sec 80GG in this case.

Who will be benefited?

The government move will benefit the common man. Employees working on ad hoc and contract employees, who receive a consolidated salary without demarcation under various heads, would be largely benefited by this change.

The earlier cap of Rs 2,000 a month was unrealistic and the demand to increase the same was long-pending. Rising inflation levels and prevalent market conditions had hit the small taxpayers hard and this move will provide them the much-needed leeway.

Rental housing will get a boost from this change. Improvement in rental housing would translate into increasing real estate sales, as many people buy property so that they could be rented out at fair value.