Income Tax 2025

Appearance

Deductions in respect of rents paid. ​

134(1) ​

In computing the total income of an assessee, subject to other provisions of this section, there shall be deducted any expenditure incurred by him towards payment of rent (by whatever name called) in respect of any furnished or unfurnished accommodation occupied by him for the purposes of his own residence.

134(2) ​

The deduction under sub-section (1) shall be allowable on such rent exceeding 10% of his total income, subject to a maximum of five thousand rupees per month, or 25% of total income for tax year, whichever is less.

134(3) ​

For the purposes of deduction under sub-section (1), such other conditions or limitations having regard to the area or place in which such accommodation is situated and other relevant consideration, as prescribed, shall be taken into account.

134(4) ​

No deduction under this section shall be allowed to an assessee in any case, where—

  • (a) any residential accommodation is— (i) owned by the assessee or by his spouse or minor child or, where such assessee is a member of a Hindu undivided family, by such family at the place where he ordinarily resides or performs duties of his office or employment or carries on his business or profession; or (ii) owned by the assessee at any other place, being accommodation in the occupation of the assessee, the value of which is to be determined under section 21(6) or (7)(a); or
  • (b) the assessee has any income falling in Schedule III (Table: Sl. No. 11)

134(5) ​

For the purposes of this section, the expressions “10% of his total income” and “25% of his total income” shall mean 10% or 25%, as the case may be, of the total income of the assessee before allowing deduction for any expenditure under this section.

Explanation

Section Summary: ​

This section allows taxpayers to claim a deduction for rent paid for their residential accommodation, whether furnished or unfurnished, while computing their total income. The deduction is subject to certain conditions and limitations, such as a cap on the amount and exclusions for specific scenarios.

Key Changes: ​

  1. Introduction of Rent Deduction: This is a new provision that allows taxpayers to deduct rent payments from their total income, which was not explicitly covered under the prior income tax law.
  2. Caps and Conditions: The deduction is limited to the lesser of ₹5,000 per month or 25% of the taxpayer’s total income, and only applies to rent exceeding 10% of their total income.
  3. Exclusions: No deduction is allowed if the taxpayer owns residential accommodation at their place of residence or work, or if they have specific types of income listed in Schedule III.

Practical Implications: ​

  1. For Individual Taxpayers: Rent-paying individuals can reduce their taxable income by claiming this deduction, provided they meet the conditions. This is particularly beneficial for salaried individuals or self-employed professionals who do not own a home.
  2. For Businesses: Not directly applicable to businesses unless the business owner is claiming rent for their personal residence.
  3. Exclusions: Taxpayers who own residential property at their place of residence or work cannot claim this deduction, even if they pay rent elsewhere.

Critical Concepts: ​

  1. Total Income: Refers to the taxpayer’s gross income before applying this deduction.
  2. Rent Exceeding 10% of Total Income: Only the portion of rent that exceeds 10% of the taxpayer’s total income is eligible for deduction.
  3. Caps: The deduction is capped at ₹5,000 per month or 25% of total income, whichever is lower.
  4. Exclusions: Deduction is not allowed if the taxpayer owns residential property at their place of residence or work, or if they have income falling under Schedule III (Table: Sl. No. 11).

Compliance Steps: ​

  1. Document Rent Payments: Maintain rent receipts or agreements as proof of payment.
  2. Calculate Eligibility: Determine if the rent paid exceeds 10% of total income and falls within the ₹5,000/month or 25% of income cap.
  3. Exclusion Check: Ensure that the taxpayer does not own residential property at their place of residence or work, and does not have income under Schedule III.
  4. File Claims: Include the deduction while filing the income tax return under the relevant section.

Examples: ​

  1. Scenario 1:

    • Total Income: ₹6,00,000
    • Rent Paid: ₹7,000/month (₹84,000/year)
    • 10% of Total Income: ₹60,000
    • Rent Eligible for Deduction: ₹84,000 - ₹60,000 = ₹24,000
    • Cap: ₹5,000/month x 12 = ₹60,000 or 25% of ₹6,00,000 = ₹1,50,000 (whichever is lower, so ₹60,000)
    • Final Deduction: ₹24,000 (since it is less than ₹60,000)

  2. Scenario 2:

    • Total Income: ₹10,00,000
    • Rent Paid: ₹20,000/month (₹2,40,000/year)
    • 10% of Total Income: ₹1,00,000
    • Rent Eligible for Deduction: ₹2,40,000 - ₹1,00,000 = ₹1,40,000
    • Cap: ₹5,000/month x 12 = ₹60,000 or 25% of ₹10,00,000 = ₹2,50,000 (whichever is lower, so ₹60,000)
    • Final Deduction: ₹60,000 (since ₹1,40,000 exceeds the cap)

  3. Scenario 3:

    • Taxpayer owns a house in the city where they work and live but pays rent for another property in a different city.
    • No deduction is allowed because they own residential property at their place of residence/work.

This section provides a structured way for taxpayers to reduce their taxable income through rent deductions, but it is essential to carefully evaluate eligibility and exclusions to ensure compliance.