Are you filing tax returns? wanting to learn about the Section 80GG deduction? You have come to the right place. Here is all you need to know about the 80GG deduction before you file your tax returns.
Alfred E. Neuman quoted as saying, ‘Today, it takes more brains and effort to fill out the income tax form than it does to earn the income.’ Understanding different tax forms is crucial for reducing their imposition burden. For instance, Section 80GG of the Indian Income Tax Act allows for a rent deduction if you don’t receive House Rent Allowance (HRA) but still pay rent, subject to specific conditions:
Conditions to claim Section 80GG deduction
Here are some of the top factors to consider before claiming Section 80GG deductions
Obtaining HRA
As a salaried individual, you should not be receiving HRA as part of salary. On the other hand, if you are a self-employed person then also you can avail its benefits.
Rent paid
Primarily, you will be able to seek the benefit of section 80GG deduction only if you are paying rent for an accommodation.
Individual or HUF
The 80GG deduction is available to individuals or Hindu Undivided Families (HUFs). If you are a taxpayer belonging to an HUF, the HUF should not own your home, place of employment, place of business, or place of profession.
Residential status
To claim the benefit, you must be either self-employed or salaried and should not own any residential property in the city where you live and work. Additionally, neither you, your spouse, nor your minor child should own property in the area where you live, work, or conduct business.
Filing of declaration
Also, you need to file Form 10BA to claim this deduction, declaring that you do not own any property in the city you reside in and that you are paying rent.
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How does section 80GG deduction work?
Let us understand the application of Section 80GG deduction with the help of following example:
Deduction Amount:
The Section 80GG deduction amount is the least of the following:
- ₹5,000 per month.
- 25% of the individual’s total income for the year (excluding long-term capital gains, short-term capital gains under section 111A, and income referred to in sections 115A or 115D).
- The actual rent paid minus 10% of the total income.
Example:
- Suppose your total income is ₹6,00,000 for the year.
- You pay ₹10,000 per month as rent, so the total rent paid for the year is ₹1,20,000.
- 25% of your total income = ₹1,50,000.
- Actual rent paid minus 10% of total income = ₹1,20,000 – ₹60,000 = ₹60,000.
- Deduction allowed = Least of ₹1,50,000, or ₹60,000.
In this case, 80GG deduction allowed would be ₹60,000.
What are the benefits of Section 80GG?
Section 80GG is particularly useful for individuals who do not receive HRA but incur rental expenses. Additionally, the other benefits of claiming a deduction under Section 80GG of the Income Tax Act are as follows:
Tax savings
The primary benefit is a reduction in taxable income, leading to tax savings. This deduction lowers your tax liability, particularly if you don’t receive House Rent Allowance (HRA).
Benefit for non-salaried individuals
Section 80GG deduction is especially advantageous for self-employed individuals or salaried persons who don’t receive HRA as part of their salary, allowing them to claim a deduction for rent paid.
Flexibility
The deduction applies to both owned and rented accommodations, provided you do not own property in the city where you work, offering flexibility for those living in rented accommodation due to work.
Encourages rental housing
With this provision of a tax deduction for rent paid, Section 80GG deduction encourages you to opt for rental housing, which can be more economical and flexible compared to buying a home, especially in urban areas.
No limit on income
There is no upper limit on the income of an individual claiming this deduction. As long as the rent paid exceeds 10% of the total income, and other conditions are met, the deduction can be claimed.
Section 80GG calculation with example
Let’s consider an example of how an individual can benefit from claiming a deduction under 80GG:
Rahul, a self-employed graphic designer who makes ₹8,00,000 a year, gains a lot of advantages by filing for a Section 80GG deduction. He pays ₹12,000 in rent each month, or ₹1,44,000 yearly, even though he does not receive House Rent Allowance (HRA).
Here Rahul is entitled to a 80GG deduction for the rent he pays because he does not own any residential property in the city in which he lives and works.
To determine his 80GG deduction, the calculation considers three possible amounts:
- ₹60,000, which is the maximum limit set by Section 80GG (₹5,000 per month);
- ₹2,00,000, which is 25% of his total income; and
- ₹64,000, which is the rent paid minus 10% of his income.
The lowest of these three amounts, ₹60,000, becomes his allowable deduction.
Rahul lowers his taxable income from ₹8,00,000 to ₹7,40,000 by claiming this deduction. His tax liability is reduced by this modification, saving him ₹13,000. Rahul’s tax liability would have been ₹85,800 without the Section 80GG deduction. However, with the deduction, it is reduced to ₹72,800. This example shows how Rahul, a self-employed person, can save money on taxes and lower his taxable income by taking advantage of Section 80GG deduction even though he does not receive an HRA component in his wages.
What are the steps to claim 80GG deduction?
To claim a deduction under Section 80GG of the Income Tax Act, you need to follow these steps:
1. Ensure eligibility
You should ensure your eligibility for the deduction keeping into consideration the above-mentioned conditions to claim deduction under Section 80GG.
2. File Form 10BA
Form 10BA is a declaration that you must file to claim a Section 80GG deduction. It confirms that you are paying rent for your residence and do not own any property in the city where you live.
3. Details required in Form 10BA
-
- Name and address of the taxpayer
- PAN of the taxpayer
- Address of the rented property
- Rent paid amount
- Name and address of the landlord
- Mode of payment (cash, cheque, and more)
4. Calculate deduction
Furthermore, calculate the 80GG deduction as described in the Income Tax Act. You may also refer to the section on ‘Deduction Amount’ and the subsequent example for illustration purposes.
5. Maintenance of documents and records
Maintain documents of the rental agreement and rent receipts. These records could be needed by the Income Tax Department as evidence of paid rent. If the annual rent exceeds ₹1,00,000, make sure you obtain a valid PAN from the landlord. This is required, and Form 10BA should include a reference to the PAN.
6. Claim the deduction in your income tax return
Make sure to include the part 80GG deduction in the relevant part of your income tax return (ITR). If you’re filing online, input the amount of the deduction and the specifics of the rent paid. The deduction will be computed automatically by the system and added to your return.
7. Submit the ITR
Once all the required information has been accurately entered, submit your ITR. Ensure that you e-verify your return in order to finish the filing procedure.
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Wrapping Up
As Jonathan Winter has said that ‘If your ship doesn’t come in, swim out to meet it’, hence by following all these steps, you can successfully claim a deduction under Section 80GG, reducing your taxable income and thereby lowering your tax liability.
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