Know the benefits of living in rented house

House rent allowance, or HRA, is a major component of your salary. This is given by an employer to an employee to meet the cost of renting a home.

As a salaried employee you can claim a tax exemption on such an amount. But there are certain conditions that you need to understand to claim such exemptions.

The tax exemption on HRA is computed as the minimum of following three conditions: i) Actual HRA as per you pay slip; ii) 40%/ 50% of your basic salary; iii) The rent amount minus 10% of the salary

If you stay in a metro — Mumbai, Kolkata, Delhi or Chennai — your HRA would be 50% of your salary. In other cities/towns, it would be 40% of salary. For example, if your salary is Rs 40,000 and you live in Mumbai, HRA would be Rs 20,000 (50% of the salary). Let's assume that you pay a rent of Rs 15,000. The amount of rent paid minus 10% of the salary is Rs 6,000. The least of these is Rs 6,000, which would be taken as the HRA exemption. Hence the balance (i.e. rent minus HRA exemption) Rs 9,000 will be taxed.

You can claim exemption on rent given to parents. For example, you live with your parents and pay them rent. This would technically make your parents the landlords. In such an case, one of your parents should declare the rent paid by you in his/her personal income tax return to prevent litigation in future. However, you cannot claim exemption on rent paid to your spouse. Tax experts say that the relationship between a husband and wife is not commercial in nature and they are supposed to stay together.

You should provide your employer with accurate rent information so that the company can credit you with the eligible amount of relief before deducting tax at source. Another alternative is that you can also claim such exemption when you file the tax return and seek a refund.

If you receive HRA for the period during which you were not occupying a rental accommodation, then you can’t claim any tax exemption. In all cases it is advisable for you to maintain rent receipts as they are the only proof for rent payments.

According to Section 195, all Indian income of an NRI is subject to TDS. This rule applies to rent too.

Any resident Indian is subjected to TDS for rents of over Rs 1.20 lakh per annum. “But if you have rented a house from an NRI landlord, the onus is on you to deduct tax at source and pay it to the government.

The TDS is a flat 30.9%,” says Vaibhav Sankla, executive director, Adroit Tax services.

If you have taken a home loan to buy a house, say, in Mumbai, but you reside in another city, you can get tax benefits on your housing loan.

If you have bought a house but stay in a rental accommodation in the same city because your house is not ready for possession, you are entitled to tax benefits on HRA. “You can claim tax benefits on the home loan only if your home is ready to live in during that financial year. Once the construction on your home is complete for possession, the HRA benefit stops,” explains Mr Sankla.

However, if you have bought a house by taking a home loan and stay in a rented accommodation after giving you house on rent, you will be entitled to all the tax benefits mentioned above.

The government had announced the new perquisite rules in December 2009, which are effective retrospectively from April 1, 2009. The value of the perquisite determined in case of furnished accommodation is 10% per annum of the cost of furniture if owned by the employer. In case of hotel accommodation, the perquisite value is to be determined as 24% of the salary paid or payable or actual hotel charges paid by the employer, whichever is lower, for the period during which such accommodation is provided to the employee, explains Vikas Vasal, executive director of KPMG.

So under the new rules, should one opt for rent-free accommodation or claim exemption on HRA? “You should take a decision keeping in view your requirements, salary level, perquisite value and the tax impact,” adds Mr Vasal.

source:economictimes.com

Tax exemption on profit from home sale

Many a time, due to family requirements or due to re-location, a person intends to acquire a new residential house by investing the sale proceeds of his existing house property.

Is the capital gain arising from the sale of the earlier house taxable or can one claim tax exemption?

Who can claim the exemption

In case of an individual or a Hindu Undivided Family (HUF), the capital gains arising from transfer of a long-term capital asset — buildings or lands appurtenant thereto and a residential house — could be claimed as exempt under the provisions of the Act if such capital gains are invested in acquiring another residential house (new residential house).

Time period

The new residential house should be purchased within one year before or two years after the date on which the earlier house is transferred.

Similarly, the new residential house could also be constructed within a period of three years from the date of transfer of the original house.

Exemption limit

The amount of the capital gains that is invested to purchase or construct a new residential house is exempt from tax.

In case the amount of the capital gain is more than the amount of the cost of the new residential house then the balance amount of capital gain would be liable to tax.

Capital gains account scheme

In case the capital gains arising from the sale of the house is not utilised for the purchase or construction of a new residential house, then the tax payer may still claim exemption by depositing such capital gains in a specified account with any bank or institution as per the provisions of the Act. It is pertinent to note that such amount must be deposited under the capital gains account scheme before the due date of furnishing the return of income by the tax payer to claim the necessary exemption.

Further, the amount so deposited in the bank must be utilised for purchase or construction of new residential house within the time period specified above else the balance amount that is not so utilized shall be chargeable to tax in the financial year in which the period of three years from the date of transfer of original house expires.

Caution, if new house is transferred

If the new residential house for which an exemption as has been claimed as above is transferred within a period of three years from the date of its purchase or construction then for the purpose of computation of the capital gains arising from the transfer of the new residential house, the cost of such house shall be reduced by the amount of the capital gains to the extent an exemption has been claimed earlier.

Thus, say if the capital gains arising from the sale of the earlier house were equal to the cost of the new house, and an exemption was claimed for the entire amount of the capital gains. Now, when the new house is transferred within three years, then its cost will be taken as Nil. Therefore, the entire amount of capital gains arising from the sale of the new asset would be liable to tax.

Beneficial provision

If due caution is taken in respect of the time lines for purchase / construction of the new house, deposit of money into capital gains scheme and also in respect of the transfer of the new residential house, the capital gains amount from transfer / sale of the residential house could be claimed as exempt.