Tax nuances – HRA and home loan

The Income Tax Act treats HRA and home loan deductions under separate sections independently. The two are not interconnected to each other. HRA is dealt with in section 10(13A) Rule 2A while home loans are entitled for tax benefits under section 80C (tax benefit on principal repayment) and Section 24 (tax benefit on interest payment) of the Income Tax Act. Hence, feel free to avail both tax benefits accordingly.

Ajit, currently employed with Company A, is staying in a rented apartment in Mumbai and has bought himself a property in Chennai for which he has taken a home loan. He finds himself in a dilemma while filing tax returns – “Can I claim both HRA and home loan benefits?” This seems to be a confusing factor for most tax payers.  When Ajit pays rent, under the Income tax act, he is definitely allowed to claim both HRA and home loan benefits (interest payment and principal repayment).

Let us evaluate various possible situations an individual can find himself in and understand what the income tax act permits him to do.

1: You live in your own house

You have taken a home loan and residing in the house purchased with it. Since you are residing in your own house, you will not be able to claim HRA. However, you will be able to claim tax benefits on both, the principal and interest repaid on the home loan.

2:  You own a house in another city

This situation was the one faced by Ajit. He resided in Mumbai but had bought an apartment in Chennai taking a home loan. Ajit 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)

You have bought a house in Mumbai taking a home loan and you’re currently living in Mumbai in a rented apartment because the house is under construction. In such a case, you are eligible to claim HRA.

In the case of tax breaks on the home loan, you can claim tax benefits only for your principal before the completion of your house. Once your house is completed, you can claim tax benefits on the total interest paid upto the date of completion in five equal installments in five years begining from the year of completion.

4:  You have a house which is ready for occupation but you cannot reside in it

You have bought a house in Delhi taking a home loan and now you aren’t residing in it but are living in a rented apartment in Delhi itself for genuine reasons e.g. the house that you have bought is far away from your office. 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, please note 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 took a home loan and your house is now ready for occupation. You have rented the same out while you reside in a rented house. The Income tax act allows 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.

The Income Tax Act treats HRA and home loan deductions under separate sections independently. The two are not interconnected to each other. HRA is dealt with in section 10(13A) Rule 2A while home loans are entitled for tax benefits under section 80C (tax benefit on principal repayment) and Section 24 (tax benefit on interest payment) of the Income Tax Act. Hence, feel free to avail both tax benefits accordingly.

Now, that we have dealt with all possible situations with regard to availing HRA and home loan tax benefits, let’s take Ajit’s situation as an example to help you figure out how to avail them.

Claiming tax benefits on a home loan:

Ajit had purchased an apartment in Chennai for Rs. 38 L three years back. He took a home loan of Rs 32 L to fund this house purchase.  So far, this year he has  repaid an interest of Rs 3.3 L and a principal amount of Rs. 60,000.

Section 80C offers tax rebate on home loans upto a limit of Rs 1 lakh and Section 24 on interest upto a limit of Rs 1.5 lakh. So, Ajit can utilize upto Rs.1.5L on his interest paid and avail the tax benefits in full for the amount  paid towards principal.

Calculating tax benefits on HRA :

Ajit earns a basic salary of Rs 40,000 per month and has rented an apartment in Mumbai for Rs 20,000 per month (he is eligible for 50% of the basic pay for HRA exemption, as he resides in a metro). The actual HRA he receives is Rs 25,000.

These values are considered to find out his HRA tax exemption:

a. Actual HRA allowance from the employer, i.e. Rs 25,000,

b. 50% of the basic salary as he resides in a metro (else 40%), i.e. Rs 20,000, and

c. The actual rent he pays for the house from which 10% of his basic pay is deducted, i.e. Rs 20,000 – Rs 4,000 =Rs 16,000

The value considered for his actual HRA exemption will be the least value of the above figures. Hence, the taxable HRA amount for Ajit per month will be Rs. 25,000 – 16,000 (available HRA deduction) =Rs. 9,000