TWIN BENEFITS: HRA AND HOME LOAN INTEREST
Does the Income Tax Act allow a person to claim deduction for HRA and also for interest on home loan?
There has been a lot of ambiguity with regard to above question and taxpayers seek frequent clarity on above
HOUSING RENT ALLOWANCE:
HRA exemption can be claimed under section 10(13A) of the Income-tax Act, 1961. The tax benefit of house rent allowance (HRA) is available only to a salaried person, who receives HRA from his employer.
First and foremost, an individual must be paying rent for claiming HRA deduction.
To calculate this exempted amount, lowest of these three is considered:
1) Actual HRA received from the employer,
2) 50% of salary if employee lives in a metro city; and 40% if the employee lives in a city other than a metro, and
3) Actual rent paid minus 10% of salary (basic plus dearness allowance plus turnover-based commission).
The HRA benefit is only available with respect to accommodation taken on rent in the city where you generally perform your duties.
It is not available, in cases where the accommodation is either partly or fully owned by the assessee himself. So, if an employee lets out a property owned by him to his employer and the employer, in turn, allots the same to the employee and recovers some rent on this account, the HRA benefit cannot be claimed. Likewise, if the employee is a joint owner of a property and pays some rent to the other joint owner/s of the property, the HRA benefits on such payment also cannot be claimed.
HOUSING LOAN BENEFITS
Home loan tax benefits are calculated in a different manner. In case of a home loan, the deduction on principal repayment can be claimed under section 80C of the income-tax Act, up to the threshold limit Rs1.5 lakh, or the actual principal repaid—whichever is less. The benefit on interest portion of the loan repayment can be claimed up to the threshold limit of Rs2 lakh, under section 24B of the Act.
According to income tax laws, there are no legal restrictions vis-à-vis claiming HRA benefits and home loan benefits at the same time
You can claim HRA exemption as well as the deduction for home loan repayment if-
CASE1 : you own a house—which has a home loan—and live in another house on rent. The caveat is, the house you own and the one you live in should be in different cities; or you should have a good reason for not living where you own the house. The reasons for this could be that you work in a different city, or even that your office is too far from your house—in case the house is in a distant suburb of the city.
Example: Rohan lives in a rented house in Noida since his own office, son’s school and his wife’s office are in Noida, He has his own house on the outskirts of Delhi which is quite small and also lying vacant. He is paying interest on the loan on his own house.
Rohan can claim:
- HRA for rent he pays for the house in Noida, and
- Deduction on interest up to Rs 2,00,000 on the home loan
CASE 2: you have rented out the house on which you have a home loan, and you live in another house on rent.
Example: Shreya recently bought a flat in Indore, though she lives and works in Bangalore. She has no plans of returning to Indore in the next five years so she gives that flat on rent and pays interest on home loan. She lives on rent in Bangalore.
Shreya can claim:
- HRA for the rent she pays for the house in Bangalore and
- Claim the entire interest she pays during the year on the home loan
CASE 3: if you take a home loan to buy a house that is under-construction, and during the period of construction you live in a rented house. In this case, you can claim the HRA exemption as well as the home loan deduction for that period.
However, the home loan deduction benefit can only be claimed for payment of interest component of the loan, and not for principal repayment. Also, you can claim it in five equal installments over the years, after you get possession of the house.
In case you are claiming HRA benefit but not staying in that accommodation, income tax department can take penal action against you for providing inaccurate information in your ITR. The benefit should be claimed only in genuine cases and not for tax evasion. So, in case you have let out your own house and receive the rent in cash and have taken a house on rent, it is advised to refrain from misusing the provisions of the law, to evade the legitimate dues to the government.