When investing in property, individuals are required to pay taxes. However, the property sector also offers tax deduction benefits that can be advantageous to many. For example, while individuals can take advantage of home loan tax deductions when opting for a home loan, they can also benefit from exemptions under the Home Rent Allowance (HRA) if they are living in a rented property. There has been a common misconception that individuals who claim tax benefits from a home loan cannot simultaneously claim the HRA benefit. Homeowners under the old tax regime paying their home loan and getting HRA as part of their salary can avail tax benefits from both and thus lower the income that will be taxable. This article aims to clarify that this belief is incorrect and will explain how individuals can avail of both tax benefits.
What is House Rent Allowance (HRA)?
The House Rent Allowance (HRA) is a component of a person’s salary that allows them to cover expenses related to house rent. Tax exemption on HRA can be claimed under section 10 (13A) at whatever is lowest among the mentioned three options:
1) The actual HRA
2) 50% of your basic salary plus dearness allowance (DA), if they live in a metro city; 40% for non-metros
3) Actual rent paid minus 10% of your basic salary plus DA
When can you claim HRA?
- Salaried employees can claim HRA.
- One cannot claim HRA for a property that he owns.
- HRA can be claimed only for months for which rent has been paid.
- Actual rent has to be paid and rental receipts have to be produced to claim HRA tax benefits.
What is a home loan?
A loan that has been secured to buy a house, construct, repair, renovate or redevelop is known as a home loan.
What are the tax deductions available under home loan?
The Income Tax Act, 1961 provides tax benefits for home loans. The deductions available are:
- Home loan interest deduction under section 24(b): Under this, in case of self-occupied property, a tax deduction up to Rs 2 lakh per year can be claimed. In case of rented property tax deduction on actual interest paid (even if it exceeds Rs 2 lakh) can be claimed. Note that total loss from house property can be offset against other income and this is available up to Rs 2 lakh per year.
- Home loan interest deduction under section 80EEA: Under this, Rs 1,50,000 per annum can be claimed towards the interest component of the home loan repayment of affordable housing.
- Principal repayment under section 80(C): A tax deduction of upto Rs 1.5 lakh for each financial year can be claimed for home loan principal repayment. However, you can claim this if you do not sell the house within five years of possession. In case the house is so before five years, all the tax deductions will be reversed and will be added to the taxable income in the year in the property’s year of sale.
Can tax benefits on HRA and home loan be claimed together?
Even if both the houses- the one which you claim HRA for and the one on which there is a home loan are located in the same city, you can claim both HRA and home loan tax benefits. While HRA tax benefit is for the rent that you pay, the home loan interest and principal tax benefit is for the property that you own.
Eligibility to claim home loan and HRA together
- Employees must be salaried and receive HRA as part of CTC.
- Employee has to stay in rented accommodation in the city that he/she works in
- Home loan should be availed in employee’s name or in joint name with spouse
Example
Nisha, a resident of Mumbai has bought a 1 BHK in the city for which she pays a monthly interest of Rs 20,000 per month on the home loan. Her family resides in this property. She works in Pune and stays in a rented accommodation by paying Rs 10,000 as rent per month. Nisha as part of her CTC gets HRA of Rs 15,000. Her basic salary is Rs 40,000 per month.
As per calculations under old tax regime
HRA received as part of CTC: Rs 15,000
HRA calculation
HRA calculated as 40% of basic salary (staying in Pune- non-metro city).
- 40% of Rs 40,000 = Rs 16,000
- Rent paid -10% of basic salary: Rs 10,000- Rs 4,000 = Rs 6,000.
Therefore, HRA that is exempted is Rs 6,000. The remaining HRA- Rs 15,000- Rs 6,000= Rs 9,000 will be part of Nisha’s taxable income.
Rent paid – 10% of Basic = Rs.10,000 – Rs. 4,000 = Rs. 6,000
Therefore HRA exempt = Rs.6,000. Remaining HRA of Rs 15,000 – Rs 6,000 = Rs.9,000 will form part of his taxable income under Salaries on account of HRA.
Tax deduction on interest on home loan is explained below:
Gross annual value of Nisha’s property is 0 as Nisha’s family stays in the property. So, deduction on interest on home loan = Rs 2,00, 000 ( for self-occupied houses)
Thus, income from house property = (-) Rs 2,00,000, which will be added to Nisha’s taxable income.
Scenarios when home loan and HRA can be claimed together
- Owning property in one city and staying on rent in another
In case a person owns a property in one city for which he took a home loan and works in another, where he stays on rent, then he can claim for home loan interest deduction for his own property and HRA tax exemption for the property on which he stays on rent.
- Staying on rent when property is under-construction
In case the property is under-construction and because of this you are staying on rent, then, you can claim tax deductions on both home loan and HRA.
- Property let out on rent
In case you have rented your property for which you have taken a home loan and are staying on rent, you can claim home loan interest tax exemption and HRA.
Documents required to claim HRA and home loan tax deductions
HRA
- Rental agreement
- Rental receipts
- Employer declaration
Home loan
- Possession letter
- Home loan statement from the bank
- Completion certificate of the property
How do you calculate tax benefits if HRA and home loan together?
- HRA tax benefits can be calculated under the head- Income from salary that is capped at a certain level.
- Home loan interest deduction is categorised under Income from house property and can be claimed under section 24(b).
- Home loan principal repayment tax deduction is categories under chapter VIA of section 80C.
When can you not claim HRA and home loan tax benefits together?
- In case you have taken a home loan for a property that you are residing in and are also receiving HRA with your salary, you can claim home loan tax deduction on interest. However, HRA tax deduction can’t be availed as you don’t pay rent – you can’t pay rent to the property you own.
- In case you have a house in a city and are staying on rent in the city, you may not be able to claim HRA exemption unless a justified reason is given.
How can self-employed person avail HRA and housing loan tax benefits together?
A self-employed person can avail HRA under section 80GG and then avail housing loan tax benefits under the above mentioned sections of the Income Tax Act, 1961.
Housing.com POV
While the Income Tax Act, 1961 allows people to avail of tax benefits from home loan and HRA, people should understand that they can do this only if they are eligible to do so. Claiming HRA for a self-occupied house on home loan for which you don’t pay rent is illegal. In case this is detected by tax authorities, the person will be subjected to heavy penalties in addition to paying the taxes evaded retrospectively.
FAQs
Which are the metro cities used for HRA calculation in India?
Delhi, Mumbai, Chennai and Kolkata are the metro cities used for HRA calculation in India.
Which are the non-metro cities used for HRA calculation in India?
Noida, Gurgaon, Faridabad, Navi Mumbai, Thane, Bangalore, Hyderabad, Pune and Ahmedabad are some of the non-metro cities used for HRA calculation in India.
Under which tax regime can a person avail of HRA and home loan tax exemption simultaneously?
A person can avail of HRA and home loan tax exemption simultaneously if he is following the old tax regime.
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