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I. If you are paying rent.
II. If you have bought/constructed property by taking a home loan.
These are discussed as follows:
I. IF YOU ARE PAYING RENT. a) Deduction under section 10(13A) for House Rent Allowance.
House Rent Allowance (HRA) is received by the salaried class. A deduction is permissible under Section 10(13A) of the Income Tax Act, in accordance with Rule 2A of the Income Tax Rules. You can claim exemption on your HRA under the Income Tax Act if you stay in a rented house and get a HRA from your employer.
The HRA deduction is based on salary, HRA received, the actual rent paid and place of residence. The place of residence is important. For Mumbai, Kolkata, Delhi or Chennai, the tax exemption on HRA is 50 percent of the basic salary, while for other cities it is 40 percent of the basic salary.
The city of residence is to be considered for calculating HRA deduction.
The least value of these is allowed as tax exemption on HRA:
- Actual rent allowance the employer provides as part of salary in the relevant period during which the rental accommodation was occupied
- Actual rent paid for the house, less 10 percent of basic pay
- 50 percent of basic salary if you reside in Mumbai, Calcutta, Delhi or Chennai, or 40 percent if you reside in other cities.
- In order to claim the exemption, the rent must actually be paid for the rented premises which you occupy.
- Also, the rented premises must not be owned by you. As long as the rented house is not owned by you, the exemption of HRA will be available up to the limits specified.
- For the purpose of this deduction, salary means basic salary and includes dearness allowance, if the terms of employment provide it, and commission based on a fixed percentage of turnover achieved by the employee.
- The deduction is available only for the period during which the rented house is occupied by the employee and not for any period after that.
- It is to be noted that the tax benefits for home loans and HRA are two separate aspects. In case you are paying rent for an accommodation, you can claim tax benefits on the HRA component of your salary, while also availing tax benefits on a home loan.
- You need to submit proof of rent paid through rent receipts, duly signed and stamped, along with other details such as the rented residence address, name of the owner, period of rent etc.
Actual HRA received = Rs 8,000
50 percent of basic salary = Rs 10,000
Excess of rent paid over 10 percent of salary, i.e., Rs 5,000 less Rs 2,000 = Rs 3,000.
As such, Rs 3,000 per month is the least and will be the exemption allowable for HRA deduction.
b) Deduction under Section 80GG for Rent Paid.
Under Section 80GG, an Individual can claim a deduction for the rent paid even if he does not get HRA. Not many people are aware of this deduction.
Section 80GG allows the Individuals to a deduction in respect of house rent paid by him for his own residence.
Such deduction is permissible subject to the following conditions:-
- The Individual has not been in receipt of any House Rent Allowance from his employer specifically granted to him which qualifies for exemption under section 10(13A) of the Act;
- The Individual files the declaration in Form No. 10BA.
- The employee does not own:
- any residential accommodation himself or by his spouse or minor child or where such Individual is a member of a Hindu Undivided Family, by such family, at the place where he ordinarily resides or performs duties of his office or carries on his business or profession; or
- at any other place, any residential accommodation being accommodation in the occupation of the Individual, the value of which is to be determined under Section 23(2)(a) or Section 23(4)(a) as the case may be.
- He will be entitled to a deduction in respect of house rent paid by him in excess of 10% of his total income, subject to a ceiling of 25% thereof or Rs. 5,000/- per month, whichever is less. The total income for working out these percentages will be computed before making any deduction under section 80GG. In other words, eligibility will be the least amount of the following:-
- Rent paid minus 10 percent the adjusted total income.
- Rs 5,000 per month.
- 25 percent of the adjusted total income.
- The deduction will also not be available to an assessee if any residential accommodation is owned by the assessee at any other place, which he is occupying, and the concessions in respect of self-occupied house are claimed by him for that property. In such a case, no deduction will be allowed in respect of the rent paid, even if the person does not own any residential accommodation at the place where he ordinarily resides.
a) Deduction available under Section 80 C for Principal repayment of the home loan.
As per section 80C, an Individual and a HUF can claim principal repayment component of a loan along with other eligible items like Life Insurance Premium, NSCs, EPF, ELSS and stamp duty and registration charges etc.
- The overall deduction is restricted to Rs. 1.5 lakh in a year.
- Remember the deduction is only for residential house property and not for commercial property. Besides, it is also available only for purchase or construction of a house and not for renovation, additions or repairs on any existing house property.
- You can claim principal repayment if you have taken a loan from a specified entity like banks, HFCs, Central & State government, LIC, NHB, Public Company or a Public Sector Undertaking. Even a University established by law or a local authority or corporation established under State or Central laws also are covered under the category.
- Moreover, in case you sell the house acquired with a home loan, within five years from the end of the year in which possession of the house was taken, all the deduction allowed for Principal repayment in earlier years shall be withdrawn. This shall be treated as income of the year in which this property is sold. Moreover, no deduction under Section 80 C shall be allowed for principal repayment made during the year.
In addition to the deduction for Principal, Section 24(b) of the Income Tax Act allows you a deduction for interest payable on the loan is taken to buy or construct a house property, or even for repair or reconstruction of an existing property.
- This benefit is available for the residential and commercial property as well.
- It may be interesting to note that even processing fee paid in respect of home loan shall also be treated as interest so you can claim a deduction in respect of processing fee paid for taking such loan.
- Even in cases where you prepay your loan, you will be entitled to claim the amount of any prepayment fee paid to the bank for such prepayment. Here you can claim the benefits in respect of loans taken from your friends and relatives besides banks and financial institutions.
- The deduction is available for self-occupied as well as let-out properties too. For self -occupied property, the deduction is restricted to Rs. 2 lakhs p.a. For let-out property, you can claim full interest. If you have more than one self- occupied houses, you have to select one house as self-occupied and the other house/s shall be treated as let-out. In this case, you have to offer notional rent for taxation and can claim the full interest payable. So in order to maximize your tax benefits, it is always advisable to treat the property on which interest is lower as self-occupied in case interest payable on any or all of the property is more than Rs.2 lakhs.
- For under construction property, you can only claim the interest deduction from the year construction is complete and possession was taken. However, in respect of interest paid for the period prior to the year for taking possession, you can claim aggregate of such interest in five equal installments from the year in which construction is completed. There is no reversal of interest benefit even if you sell the house before five years as is applicable for repayment benefits.