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How I saved ₹ 16,000 income tax on my house rent

The problem

Last year, I was looking for renting a place for myself in Pune. Similar to everybody else out there, I wanted a nice place, maybe fully or semi furnished in a good location. But, my budget was in the range of ₹ 8000 – 9000. I searched a lot, almost on every forum online as well as through many brokers. But, every place I liked was going out of my budget. 

One day, I came across a listing of a 2BHK full furnished apartment in a gated society at a prime location. I liked it a lot. It appeared to be exactly the same as I had imagined. Except, it was priced at the rent of ₹ 21,000. I know it may not be a solution for everyone, but I immediately wondered what if I get a flatmate!

The idea

I gave this idea a thought. This was a big flat with 2 balconies, a very big hall and spacious rooms, and had everything that’s needed. I can very well have my own space while enjoying every utility coming with this flat.

So, I decided to move ahead with this deal. I called one of my friends and pitched her my idea to move to this flat. She was living alone in an unfurnished 1RK while paying rent of ₹ 8,000. She got convinced with my deal. We approached the owner, and he told the rent of ₹ 21,000 per month. (which is average rent of 2BHK in the particular area of Pune)

We anyhow negotiated a deal of ₹ 20,000. But, it still was going above my budget. I didn’t want to more than ₹ 9,000. While I was going back and forth on having a flatmate, just then this eureka moment came to me!

The solution

My friend was having an HRA component of ₹ 13,500 per month in her salary which she never utilised to date. We started doing this basic calculation for her salary.

HRA = ₹ 13,500 per month

Basic salary = ₹ 56,000 per month

Basic + DA = ₹ 64,200 per month* 

Rent – 10% of (Basic + DA) = ₹ 13,580 per month

Minimum of HRA and “Rent- 10% of (basic + DA)” is taken for tax exemption.

So, we can save tax on ₹ 13,500 per month.

As my friend comes under 20% tax slab, she can save ₹ 2700 per month!

That means we both can save ₹ 1400 per month on house rent and our effective rent, in this case, would just be ₹ 8600 per month.

We both became very happy with this solution and convinced the owner of the flat to make rent agreement only on my friend’s name. Because if we show that we both are paying rent then in such case, out “Rent – 10% of (basic+DA) = ₹ 3580” and we both can save only ₹ 716 total and ₹ 358 each only.

So, with the above little trick, we managed to live in a lavish flat in a good locality while paying a rent of just ₹ 8600 per month.

Footnotes

*DA is taken as 14.5% for this calculation. DA in FY 2019-20 was 12% till July ‘19 and was 17% after that.

**This technique can only be applied in future if you have opted for the old income tax scheme in this financial year

Want to know what things to look out before renting a place? Check it out here

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