Simplified Rent Deduction Mechanism for Non-HRA Assessees : Clause 134 of the Income Tax Bill, 2025 Vs. Section 80GG of the Income-tax Act, 1961

Clause 134 Deductions in respect of rents paid.

Income Tax Bill, 2025

Introduction

Clause 134 of the Income Tax Bill, 2025, proposes to provide deductions in respect of rent paid by an individual assessee for accommodation occupied for the purpose of his or her own residence. This provision, which closely mirrors the existing Section 80GG of the Income-tax Act, 1961, is a crucial statutory mechanism for providing relief to individuals who do not receive house rent allowance (HRA) and yet incur substantial expenditure on rent. The provision operates within the broader legislative framework of deductions under the income tax law, aiming to ensure equity among taxpayers who bear out-of-pocket housing costs. The implementation of Clause 134 is expected to have wide-reaching implications for salaried and self-employed individuals, particularly those residing in urban areas with high rental costs. The provision is also to be read in conjunction with the relevant rules, notably Rule 11B of the Income-tax Rules, 1962, which prescribes procedural compliance for availing such deduction.

Objective and Purpose

The legislative intent behind Clause 134, much like its predecessor Section 80GG, is to extend tax relief to individuals who incur rental costs for their personal residence but are not in receipt of HRA, a common component of salary packages in India. The provision seeks to address the disparity between salaried employees receiving HRA exemptions u/s 10(13A) and those who, due to the nature of their employment or business, do not receive such benefits. The policy rationale is grounded in the principle of horizontal equity, ensuring that similarly situated taxpayers, in terms of housing expenditure, are treated alike for tax purposes. The historical background of this provision reflects the legislature's recognition of rising urban housing costs and the need to provide targeted relief to taxpayers who shoulder these expenses directly.

Detailed Analysis of Clause 134 of the Income Tax Bill, 2025

1. Scope of Deduction 

Clause 134(1) establishes the foundational rule: in computing total income, any expenditure incurred by an assessee towards payment of rent for any furnished or unfurnished accommodation occupied for the purposes of his own residence shall be deducted, subject to other provisions of the section. The scope is restricted to individuals (as the language and context suggest), and the deduction is available only in respect of accommodation used for the taxpayer's own residence, not for let-out or business purposes.

The phrase "by whatever name called" ensures that the nature of the payment-whether termed rent, lease, or license fee-does not affect eligibility, provided the payment is for residential accommodation. The provision is neutral as to the form of accommodation (furnished or unfurnished), thus providing broad coverage.

2. Quantum and Limits of Deduction 

Clause 134(2) prescribes the manner of computing the deduction:

• The deduction is allowable only on rent paid exceeding 10% of total income.
• The maximum deduction is capped at the lower of:
  • Five thousand rupees per month (i.e. Rs. 60,000 per annum), or
  • 25% of total income for the tax year.

This formula is designed to ensure that only substantial rent payments relative to the taxpayer's income are eligible for deduction, and to prevent excessive claims. The "whichever is less" criterion ensures that the deduction is always within reasonable bounds, regardless of the quantum of rent paid or the taxpayer's income level.

3. Prescribed Conditions and Limitations 

Clause 134(3) authorizes the prescription of additional conditions or limitations, having regard to the area or place in which the accommodation is situated and other relevant considerations. This sub-section provides delegated legislative power to the Central Board of Direct Taxes (CBDT) to frame rules that may, for example, specify different limits for metropolitan and non-metropolitan areas, or impose procedural requirements.

This flexibility is crucial for adapting the deduction regime to changing economic conditions, regional disparities in rental markets, and policy objectives.

4. Exclusions from Deduction 

Clause 134(4) sets out specific situations where no deduction shall be allowed:

• (a) Where any residential accommodation is:
  • (i) Owned by the assessee, spouse, minor child, or, in the case of a Hindu Undivided Family (HUF), by such family at the place where the assessee ordinarily resides or performs duties of his office or employment or carries on business or profession;
  • (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 u/s 21(6) or (7)(a).
• (b) Where the assessee has any income falling in Schedule III (Table: Sl. No. 11).

The rationale is to prevent double benefits-i.e., claiming deduction for rent paid while also owning residential property at the same place or elsewhere (if self-occupied). The reference to Schedule III is a new legislative device, the details of which would require examination of the Bill's Schedules.

5. Explanation of "Total Income" 

Clause 134(5) clarifies that "10% of his total income" and "25% of his total income" mean the respective percentages of total income before allowing deduction under this section. This ensures that the computation of the threshold (10%) and the cap (25%) is made on the gross total income, preventing circularity in deduction calculation.

6. Procedural Aspects and Compliance

While Clause 134 itself does not prescribe procedural requirements, sub-section (3) contemplates the prescription of such conditions by rules. Historically, such conditions have included the filing of a declaration (Form 10BA) u/r 11B. It is anticipated that similar or additional compliance requirements may be prescribed under the new regime.

Practical Implications

The practical impact of Clause 134 is significant for individuals who do not receive HRA, such as self-employed professionals, businesspersons, and certain salaried employees. The provision provides a modest but meaningful deduction, particularly for middle-income taxpayers residing in urban areas with high rent-to-income ratios. The cap of Rs. 5,000 per month, however, may be viewed as insufficient in metropolitan cities where average rents are substantially higher.

From a compliance perspective, taxpayers must ensure that they do not own any residential property at the relevant locations, and must be prepared to substantiate their claim through appropriate documentation, potentially including a declaration in prescribed form and evidence of rent payments. The possibility of additional conditions being prescribed by rules introduces an element of uncertainty, which will need to be monitored as the Bill is implemented.

For the tax administration, the provision requires robust mechanisms for verification and enforcement, particularly to prevent abuse through false claims or misrepresentation of ownership status.

Comparative Analysis with Section 80GG of the Income-tax Act, 1961

1. Structure and Language

Clause 134 is structurally and substantively similar to Section 80GG. Both provisions grant a deduction for rent paid for personal residence, subject to specified limits and conditions. The language of Clause 134 largely mirrors that of Section 80GG, with only minor variations in drafting style and references to other provisions (e.g., "Schedule III" in Clause 134 vs. "clause (13A) of section 10" in Section 80GG).

2. Eligibility Criteria

Section 80GG: Excludes assessees having income falling within clause (13A) of section 10 (i.e., those receiving HRA exempt u/s 10(13A)).
Clause 134: Instead of explicit reference to section 10(13A), Clause 134(b) refers to "income falling in Schedule III (Table: Sl. No. 11)," which presumably serves a similar exclusionary function. The effect is to prevent overlap between HRA exemption and rent deduction.

3. Limits of Deduction

Both provisions set the deduction as the least of:

• Rent paid minus 10% of total income,
• Rs. 5,000 per month, or
• 25% of total income.

The computation methodology is identical, as is the reference to total income before deduction under the section.

4. Exclusions Based on Ownership

Both Clause 134 and Section 80GG disallow deduction where the assessee, spouse, minor child, or HUF owns residential accommodation at the place of residence or employment/business. Both also disallow deduction where the assessee owns any other accommodation that is self-occupied and whose value is determined under the relevant provisions (section 21(6) or (7)(a) in Clause 134; section 23(2)(a) or (4)(a) in Section 80GG).

5. Prescribed Conditions

Both provisions empower the prescription of further conditions or limitations by rules, particularly having regard to the area or place in which the accommodation is situated. This allows for flexibility and adaptation to changing circumstances.

6. Differences and Points of Note

• Reference to Schedule III: Clause 134 introduces a reference to Schedule III (Table: Sl. No. 11) for exclusion, whereas Section 80GG refers directly to section 10(13A). The practical effect will depend on the content of Schedule III in the new law.
• Delegated Legislation: Both provisions contemplate further conditions by rules, but Clause 134's language is broader and may allow more extensive regulatory intervention.
• Terminology for Self-Occupied Property: The cross-referencing to sections for valuation of self-occupied property differs due to the reorganization of sections in the new Bill.
• Procedural Requirements: Section 80GG, read with Rule 11B, requires filing of Form 10BA. Clause 134 does not specify this, but sub-section (3) allows for similar requirements to be prescribed.

Comparative Analysis with Rule 11B of the Income-tax Rules, 1962

1. Procedural Compliance

Rule 11B stipulates that the deduction u/s 80GG shall be allowed only if the assessee files a declaration in Form 10BA. This form requires the taxpayer to declare, inter alia, that he/she does not own any residential accommodation at the relevant location, does not receive HRA, and has paid rent for residential accommodation occupied for his/her own residence.

Clause 134 does not itself specify any procedural requirement but, as per sub-section (3), allows for the prescription of such conditions by rules. It is reasonable to expect that, upon notification of the relevant rules under the 2025 Act, a similar requirement for a declaration (possibly in a revised or renamed form) will be instituted.

2. Substantive vs. Procedural Law

Section 80GG and Clause 134 provide the substantive right to deduction, while Rule 11B operationalizes the provision by imposing procedural compliance. The interplay between substantive and procedural law is essential to ensure both the integrity of the deduction regime and administrative feasibility.

The requirement of a declaration serves as a deterrent against fraudulent claims and as an aid to tax authorities in verification and enforcement.

3. Enforcement and Compliance Burden

From a taxpayer's perspective, the requirement to file a declaration (and possibly furnish supporting documents) increases the compliance burden, particularly for self-employed individuals and those without formal rental agreements. However, this is a necessary trade-off to prevent abuse of the deduction.

For tax administrators, the declaration provides a basis for scrutiny, but also necessitates the development of systems to process and verify such declarations efficiently.

4. Anticipated Changes under the 2025 Bill

Given the continuity in legislative approach, it is likely that rules analogous to Rule 11B will be framed under the new law, possibly updated to reflect contemporary administrative practices (e.g., e-filing, digital verification).

Conclusion

Clause 134 of the Income Tax Bill, 2025, represents a continuation of the policy and structure of Section 80GG of the Income-tax Act, 1961, providing targeted relief to individuals who incur rental expenditure for their own residence without receiving HRA. The provision is well-calibrated to balance the need for relief with safeguards against abuse, through carefully crafted eligibility criteria, monetary limits, and the potential for further conditions through subordinate legislation.

The principal areas for possible reform or clarification include the adequacy of the monetary cap in light of rising urban rents, the clarity of exclusion criteria (particularly the reference to Schedule III), and the streamlining of procedural requirements to minimize taxpayer burden while ensuring effective enforcement. Judicial clarification may be required in cases of ambiguity, particularly regarding the interpretation of "owning" residential accommodation and the interaction with other provisions of the Act.

As the new law is implemented, it will be important for both taxpayers and tax administrators to remain vigilant regarding the rules and compliance requirements, and for the legislature to periodically review the efficacy and adequacy of the deduction in light of changing economic realities.

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Full Text:

Clause 134 Deductions in respect of rents paid.

 

Dated: 16-4-2025