It is the most asked
question by any salaried person and believe me it is very important to know the
conditions that when you can claim tax benefits only of HRA or of home loan or
both. So below is a comprehensive article covering all aspects of taxation on
home loan with HRA.
First of all, the answer to the
above question is simple YES.
Yes, you can enjoy the
tax benefits of home loan with HRA, as there is no relationship between
claiming HRA tax exemption and claiming interest on home loan as both have
independent provisions in Income Tax Act.
Let us dive into the
sections governs HRA and Home Loan.
Conditions for HRA exemption
House Rent Allowance
(HRA) exemption is granted under section 10(13A) of the Income Tax Act. It says
that any employee who is in receipt of any allowance by his employer for
payment of rent for his residential accommodation, irrespective of what it is
termed (HRA) is exempt from his annual income. This means HRA component is not
to be added to total income for income tax computation.
Further reading of
Section 10(13A) clarifies that this exemption will not be available
if assessee lives in a house owned by him or is not actually paying any rent.
Even if he has part ownership in the house, no HRA exemption can be claimed.
Rule 2A of Income Tax
Act which governs HRA exemption says exemption is to be taken as the lowest of
the below 3 options:
- ·
Actual House Rent Allowance (HRA)
- ·
Rent paid minus 10% of basic salary
- ·
50% of basic salary
Elementary deduction
from the above clause is that, if the rent paid is less than 10% of basic
salary, HRA exemption cannot be claimed.
Simple Example:
Mr.A earns a basic
salary of Rs. 50,000 per month and has taken an apartment on rent in
Mumbai for Rs. 25,000 per month. The actual HRA he receives
is Rs. 15,000. These values are considered to find out his HRA tax
exemption:
a. Actual HRA
allowance from the employer, i.e. Rs. 15,000,
b. Fifty per cent of the basic salary as he resides in a metro (else 40 per
cent), i.e. Rs. 25,000, and,
c. The actual rent he pays for the house from which 10 per cent of his basic
pay is deducted, i.e. Rs. 25,000 - Rs. 5,000
= Rs. 20,000
The value considered
for his actual HRA exemption will be the least value of the above figures.
Hence, the taxable HRA amount for Mr.A per month will
be Rs. 25,000- 15,000 (available HRA deduction) = Rs.10,000.
Conditions for home
loan interest deduction
Section 24(b) deals
with home loan interest deduction, states that if any assessee has borrowed any
amount (even from relatives or friends) for buying, building, renewing,
repairing or reconstructing a house, he is eligible to claim the interest
payable in that year for income tax deduction. In simple words interest payable
is deductible from income from house property.
Unlike HRA even you
hold part of a house i.e. joint or co-owner and Joint-loan borrower, you are
eligible to claim this deduction up to your share in the loan.
No provision of this
section will be violated if you are claiming HRA or any other tax benefit. This
section only stipulates a condition that an assessee cannot have more than one
self-occupied property means in case of self occupied property where the value
is taken to be nil, the owner should not be living in an owned house in another
place where he usually resides for his employment or business purpose. You can
claim that another place could be elsewhere in the same city, town or locality.
Simple Example for Better
Understanding
Mr.A had purchased
an apartment in Kolkata for Rs. 40 lakh three years back with the aid
of a home loan of Rs. 34 lakh. He has repaid an interest
of Rs. 2.3 lakh and a principal amount of Rs. 80,000 in
current year.
Section 80C allows tax
rebate on home loan principal repayment up to a limit of Rs.1 lakh (including
other benefits) and Section 24(b) on interest up to a limit
of Rs. 1.5 lakh. So Mr.A can utilize up to Rs.1.5 lakhs on his
interest paid and avail the tax benefits in full for the amount paid towards
principal of Rs. 80,000.
Claim tax benefits on
both HRA and home loan interest payment
Let us analyze various
possible situations an individual can find himself in and understand what he
can do without going against any provision mentioned in Income Tax Act
regarding HRA and Home Loan:
1: You live in your
own house
Since you are residing
in your own house there will be no HRA in this case but you are eligible to
claim tax benefits on both the principal repayment of loan u/s 80C as well as
interest on home loan u/s 24(b).
2: You own a
house in another city
In case your own house
and the house you are residing in are in different cities then you will be
entitled to HRA exemption and tax benefits on both, the principal and interest
repaid on the home loan.
3: Your house cannot
be occupied at this point (e.g. under construction)
In such a case, you
are eligible to claim HRA. Coming on to tax benefits on the home loan, you are
eligible to claim tax benefits only for the principal repayment till the
completion of your house. Once your house gets completed, you become eligible
to claim tax benefits on the total interest paid up to the date of completion
in five equal installments in five years beginning from the year of completion.
4: You have a
house which is ready for occupation but you cannot reside in it
Say your house is very
far from your working place, in such cases, the Income tax act permits the
individual to claim HRA and home loan benefits which includes both principal
and interest repaid on the home loan.
Also, remember that if
your house remains vacant, then you will still need to pay tax on a notional
rent income.
5: You have
rented your own house and currently residing in a rented house
You own a house but
you are still residing in rented house due to some reason. The Income Tax
Act permits you to claim both HRA and home loan benefits.
However, in such a
case, since you are the recipient of rent because you have let out your own
house, that income is taxable at your hands under the head Income from House
Property.
6 You have rented your
house and residing with your parents
If you are staying on
rent in a place belonging to a relative, say parents or siblings and you own
another house for which EMIs are being paid. You can still get both tax
rebates. Just make sure that your parents or siblings are filing I-T returns.
7. You live in a house
owned by your spouse and paying rent to him/her
This case is a sham
transaction in the eyes of Income-Tax Act because there is no commercial
interest between spouses unless they are living apart. Although one can contend
that Income Tax laws do not prohibit claiming HRA benefit in this case. But in
most of the cases no tax benefits of HRA can be claimed in this case.
