Lately, a number of tax payers have received tax notices from the income tax department for their HRA (house rent allowance) claim. Primarily, these tax notices were sent for not deducting 3 percent TDS (tax deducted at source) while transferring rent to the property owner. It is recommended to follow a three-step checklist to ensure it does not happen.
Three step checklist:
I. Rent agreement: First and foremost, it is vital to prepare a rent agreement. The agreement is a legal proof that the contract is real.
II. Transfer to bank account: Another important thing to remember is to transfer rent to the bank account rather than paying in cash. “When you transfer rent to the relative’s bank account rather than in cash, you create a traceable record of this transaction,” says Chirag Chauhan, a Mumbai based Chartered Accountant.
III.TDS: Another key thing to follow is to deduct 3 percent tax deducted at source (TDS) at the time of transferring the rent to the tenant.
New tax regime
Those who are opting for the new tax regime while filing their income tax return must note that the HRA exemption is not allowed in the new tax regime. So, to be able to claim HRA allowance, you must be filing your tax return under the old tax regime. This exemption is given under section 10(13A) for salaried individuals.
In fact, taxpayers can claim exemption for HRA as well as for the interest on home loan – under the old tax regime in the same year.
How is HRA calculated?
The Income Tax (I-T) department has uploaded an HRA calculator which you can access here. It helps you calculate the HRA after you enter the inputs. It asks for three parts of income: basic salary, dearness allowance (DA), commission.
Then the taxpayer has to enter the HRA received and rent paid. After entering these details, the calculator gives you the ‘exempted HRA’ as well as ‘taxable HRA’.
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