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Savings on Income Tax: As previously stated, there are several ways to pay less income tax in India, and paying rent to one’s spouse is one. This is advantageous for those in the tax bracket who wish to make a portion of their salary exempt from taxation under House Rent Allowance (HRA). Let's examine the procedure and the possible savings.
Placing in A Rent Agreement: To begin with, obtaining a Rent Agreement with Wife is a prerequisite which needs to be legally registered with the wife. It must mention the specific terms along with the amount of rent to be paid.
Rented payment proof: Payment towards rent should be remitted either by check or electronically. This action will guarantee that you have endorsement for funds.
HRA Claim: The amount which is remitted to your account can be claimed as HRA from your employer. In calculating HRA there are three primary constituents: - The actual amount of HRA which is received. - Percentage of HRA and rent paid (50% if residing in a metro city, 40% if non-metro). - The remaining balance after deducting 10% rent of paid basis salary.
What are the tax savings?
Let us assume, for your case, your monthly salary is ₹1,00,000 and you are paying rent of ₹25,000 per month to your wife. This means… HRA received per annum: ₹2,40,000 Rent Annually: ₹3,00,000 10% of Basic: ₹1,20,000
Stepwise calculation of tax exemption
Accordingly, in your case, HRA exemption will be calculated in the following manner: HRA received per annum: ₹2,40,000 Rent of – 10% of basic: ₹3,00,000 – ₹1,20,000 = ₹1,80,000 50% of Basic (in Metro cities): 50% of ₹1,00,000 = ₹6,00,000 The minimum of the three would therefore be ₹1,80,000, which is tax-free HRA claim.
Points to highlight
Genuine agreement: Rent agreements should be genuine without any form of manipulation or fraudulent activity.
Points to highlight
Evidence of payment: Evidence in the form of a bank statement or cheque payment is mandatory.
Points to highlight
Your spouse will need to declare that rental income as part of her taxable income.
What is the best advice available for you today?
If your wife has her own business, then paying rent to her can be an effective tax planning maneuver. However, you must take particular care in how it is done. Only a chartered accountant will be able to advise you properly about this.
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