Many taxpayers are in doubt if they can claim tax benefits on both House Rent Allowance (HRA) and Home Loan or not and they frequently seek clarity on the same.
So, if you are a salaried person, you will be pleased to know, in some situations, you can avail tax benefits from both of these in the same financial year. But first, let’s know the conditions for claiming tax benefits on both the fronts:
Conditions for claiming tax benefits on house rent allowance
House Rent Allowance (HRA) serves as a crucial component in the salary structure for most employees. To meet the high costs of living in a rented house, employers pay house rent allowance (HRA) to their employees. As a taxpayer, you can claim tax benefits on the amount you pay as house rent each year.
Tax exemptions on HRA:
HRA exemption can be claimed under section 10(13A) of the Income-tax Act. This exempted amount is calculated considering the lowest of these three items:
1) Actual HRA received from the employer,
2) 50% of basic salary if an employee lives in any of the four metro cities; and 40% if the employee lives in any other cities, and
3) Actual rent paid ‘Less’ 10% of salary (basic plus dearness allowance plus the eligible commission).
Conditions for claiming tax benefits on home loans
The main condition, for the allowance of the deduction on the principal and interest components of a home loan, under Section 80 C and Section 24(b), is that the person should be the owner of the house property. Tax benefits under Section 80 C, are only available for home loans taken from specified persons, for the residential house property. Interest benefits can be claimed on residential and commercial properties and on money borrowed from a bank/housing company or from anyone else. Moreover, the interest on money borrowed for a let out house property is fully deductible. In the case of self-occupied house property, Rs 2 lakh can be claimed as interest repayment exemption.
Simultaneous claim of HRA as well as a tax deduction on home loan:
One can claim both HRA and interest on home loan irrespective of the place of stay, office until and unless an individual satisfies the necessary conditions to claim such exemption. Let’s look at the case where an individual can claim both HRA exemptions and home loan interest benefits.
When someone owns a house in another city:
If you own a house in a city other than your current residing city and presently you are in a rented residence because of work in a different city, or even that your office is too far from your house, you can claim both HRA exemption and deduction on interest on the home loan. It doesn’t matter whether your owned property is actually rented or left vacant.
When the house is under construction:
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, then you will be eligible to claim a deduction for HRA. Once you get possession of the house, you will be eligible to claim tax benefits on the total interest paid till the date of house completion in five equal instalments in five years from the year of the house’s purchase or construction.
When a person resides in a rented house and rents his own house:
The third case in which you buy a house through a home loan but you decided to stay in a rented apartment and rent out your own house. The reason for this could be the house you own does not suit your needs, perhaps because it is too small in size. In this case, you are eligible to claim HRA deduction for rent paid and claim benefit for interest paid on a home loan on rented out house. In your tax declaration, you will have to declare the rental income that you earn from the let out property.
Exemptions are one of the things that every taxpayer wants to avail of to have more savings. Therefore, it is important that you should not conceal material facts. If there is scrutiny from the Income Tax Department, you may need to explain the valid reasons to support your position.