Tax nuances – HRA and home loan

By | March 10, 2011

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

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13 thoughts on “Tax nuances – HRA and home loan

  1. Passing the CNA Exam

    found your site on del.icio.us today and really liked it.. i bookmarked it and will be back to check it out some more later

    Reply
  2. Geetha

    I want to purchase a land. Can i claim the tax benefit for HRA & home loan interest as i am staying in my own house.

    Reply
  3. amar deo

    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.

    My question : if apartment in Chennai is vacant(not rented), then Ajit can claim the Both benefits. HRA & interest on home loan

    Reply
    1. Ajit

      Yes. He can claim both HRA and (home loan interest + principal repayment). However, even if the home is vacant he has to add notional rent of the home to his income.

      Reply
  4. pgarg

    is there a limit on the home loan interest for which we can claim benifit? if so is it same for all the situations?

    thanks

    Reply
    1. Ajit

      its 1.5lacs now. There is a talk of increasing this to 3lacs under Direct Tax Code.

      Reply
  5. Hemant Kharpe

    I have a house on Loan in Aurangabad. I m staying in Mumbai on rent from July 2010 till date. I have not claimed for tax benefit for the Rent paid for last 2 years. Can i claim this now. What r the documents required while filing such returns for last 2 years.

    Reply
  6. KUMAR HOYSALA

    I need your advice on this;

    I have my own house in Bangalore, staying in the same house and availing the Housing Loan benefits (both Interest & Principal) for IT.

    Recently moved to a rented house (due to family expansion / space constraint in my own house) in Bangalore.

    Currently my own house is under renovation, will take another 2 – 3 months to complete the work and i am planning to rent it out when it is ready.

    Now my question is can i claim both Housing loan (Interest & Principal) and House rent for this FY 2016-17.

    regards
    kumar

    Reply
    1. Team BankBazaar

      Hi Kumar, Yes. You can claim both HRA and housing loan benefit. However, you might need to declare the house as being rented out. We suggest that you get in touch with a Chartered Accountant for help.

      Reply
  7. T.ANASUYARANI

    Me and my husband are having two houses on our names. My house was let out and have been paying tax for the past 3years. We are living in the house which is on my husband name and in the same city. The house we are living is also partly let out and for that also we are paying income tax. My question is can I claim HRA EXEMPTION? Reply me to my mail id as I am working in a public sector.And my husband is also a government employee.

    Reply
    1. Team BankBazaar

      Hi Anasuyarani, HRA exemption is only possible if you are paying rent and if the house is not registered in your name. For example, if you’re staying at your parents house (the house is registered in their name) and you pay rent to them (you need to have rent receipts as proof), then you can claim HRA exemption. Cheers, Team BankBazaar

      Reply
  8. Sunil

    Hi,
    For a house in construction with home loan availed, the possession is taken by July 1st, 2017
    Can HRA be claimed from April 2017 till end of June 2017
    And home loan principal and interest benefits from July onwards?
    Please confirm!
    HRA and home under construction same city but claims do not overlap.
    Is this valid?

    Reply
    1. Team BankBazaar

      Hi Sunil, You can claim both HRA and Home Loan repayment tax benefits if you’re living in a house on rent and servicing a Home Loan for another property at the same time, even if both properties are in the same city. Cheers, Team BankBazaar

      Reply

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