October 20, 2020

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Download Automated All in One TDS on Salary for Non-Govt (Private) Employees for F.Y.2018-19 With claiming Tax Benefits on Home Loan and HRA together

How to claim HRA and home loan benefits together?

It
is the most asked question by any salaried person and believes 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 a 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
the 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 the 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. 

Better Understanding with Simple Example:

Sanyam
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 percent of the basic salary as he resides in a metro (else 40 percent), i.e. Rs. 25,000, and,
C.
The actual rent he pays for the house from which 10 percent 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 Sanyam 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 the 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.

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Simple Example for Better Understanding
Sanyam
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 the 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 Sanyam can utilize up to Rs.1.5 lakhs on
his interest paid and avail the tax benefits in full for the amount paid
towards the 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 the 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 a 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 the 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.

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