Tax saving is the first and foremost thing on the mind of people. But, sometimes we think that why would a tenant feel the heat of paying tax which is completely wrong as many people choose to live in a rented home while earning good because of their profession. So, those opting to live as a tenant in the residential unit of a close relative must keep the money matters separate as it can create a rift between people. Thus, here are the key things to remember while paying rent to a close relative:
1. Provision of Tax Rebate under Section 10(13A)
The income tax rules have a provision for salaried people in order to make the taxpayers save the taxable amount as some of them also live in a rented accommodation. In this case, there are two scenarios. In case one, the person seeking HRA [House Rent Allowance] allowance is eligible to save tax under Section 10(13A). This is possible if a person is actually living in a rented house and has a legal rent agreement. In other case, a salaried person may face denial of tax saving even after paying rent if the company he/she is working with won’t deduct any amount from the employee’s salary in the name of HRA.
2. Documents Required to Save Tax
The first essential thing is a leave and license agreement made legally between you and the close relative for the property/accommodation in which you are living as a tenant. The next document required to save tax is the rent receipt of every month’s rent. These two documents help you save tax and the rent receipts are also helpful to showcase as a proof to the assessing officer at the time of visit. The rent receipts are the proof that you have timely paid the landlord.
3. Payment Procedure for Paying Rent to a Close Relative
First of all, you must avoid making cash transaction to pay the monthly rental to the landlord. Secondly, remember to take a note or proof of the rent paid especially in case of cash transfer of rental amount. Most of the real estate experts feel that a tenant must pay rent via banking channel as it helps you stay on the safe side as you have the records of transaction history that won’t give the landlord a chance to accuse you of not paying the rental amount in a timely manner.
4. Tax Deduction at Source
According to an addition in the Income Tax Act this year, a person’s taxable amount is deductible at 5% on the rental amount of Rs. 50,000 per month and the same amount is required to be deposited to the Central Government.
5. ITR Filing on the Rent Payable to a Close Relative
Here are two cases. In the first case, you the tenant is required to file the Income Tax return and showcase the rental amount for the particular fiscal year. A person can file an ITR even if he/she falls under the minimum taxable amount by showcasing paying off the rental amount with all receipts as a proof.
The second case is of a tenant or the close relative in whose accommodation you are living as a tenant. Most of the time the rental amount earned is not showcased in ITR and the landlord can’t be pushed to showcase it in the filing of ITR despite falling under the minimum taxable amount. So, it is always better to showcase the amount you pay in white with accurate proofs.
6. Avail Tax Exemption on both Homeloan and HRA
A person can save tax on both the sanctioned home loan and on the rent he/she is currently paying. The person is only required to make sure that both the property on which you availed home loan and the rental accommodation in where you are currently staying should not fall under the same zone, area or the vicinity of the same corporation. The same locality of the properties can make you pay the taxable amount without any deductions.
7. Update Address & Other Details
In case you make rental payment from some other account or a location then the tax officials can raise the issue as a fraudulent transaction. So, keep your transaction deal clear and also update the details related to payment so that you can prove of making actual rental payment.
Keep these things in mind while paying rent to a close relative as here also you have the option to save tax.