Claim Both HRA and Home Loan Tax Benefits
There are various provisions in the Income Tax Act of 1961 which are regularly amended to assist Indian taxpayers enhance their tax savings potential through numerous deductions and exemptions. Individual and business taxpayers can easily avail of these benefits at the time of filing their annual income tax returns. Sadly, despite the provisions, not many are aware of them. This is further compounded by the ever-changing clauses and updates. For example, most home loan borrowers may not know that they are entitled to both House Rent Allowance tax exemptions and home loan tax benefits under the ITA, subject to certain pre-conditions.
When Can You Claim HRA Deductions for Income Tax?
The standard requirements to obtain HRA are:
- You must be a salaried employee and receive HRA from your employer
- The house you reside in and claim HRA for should not be a self-owned property
- Expenses incurred for renting a house can be availed as HRA for the number of months you pay rent.
How Is HRA Calculated?
As per ITA provisions, the lowest of the three values listed below is permitted for HRA tax exemption:
- Your annual rent minus 10% of your net basic pay per annum
- The actual HRA received from your employer/company
- 50% of your basic salary if you live in a metropolitan city; 40% for other cities
Home Loan Tax Exemption on Interest Repayment
Home loan borrowers are eligible to secure deductions on the following:
House Loan Interest Under ITA Section 24 (b)
One can claim exemptions on the loan interest up to Rs.2 lakh for a self-occupied property only after the construction is complete. If the construction activity extends over five years, the rebate value comes down to just Rs.30,000.
Also Read: Income Tax Act: Section 24
Principal Repayment as per Section 80 C of the ITA
This section provides tax relief on the principal component up to Rs. 1.5 lakh for the purchase or construction of a residential property that you own. However, you cannot sell the house for five years upon receiving possession, otherwise, the deductions claimed thus far will be reversed and added to your taxable income in the year of sale.
How Can You Claim Both HRA and Home Loan Tax Deductions?
Now that we know the HRA allowances and income tax benefits on a home loan made available to individual taxpayers, let us understand how one may claim the two exemptions together. There are effectively three ways to go about it:
1. You Have a Self-Owned House in One City but Live in Another City on Rent
When you own a house in one city but are required to live on rent in another city due to employment or business purposes, you can easily ensure tax relief on both HRA and housing loan simultaneously. If you comply with the conditions laid down for claiming HRA, you may avail the benefits under Section 10 (13 A). Alongside, you could also claim Rs.2 lakh deduction under Section 24 (b). In this case, the house will be considered self-occupied even if it is vacant or occupied by family members citing reasons for employment in another city. You can further avail Rs.1.5 lakh towards the principal repayment of your home loan for a self-occupied property.
2. You Own a Home yet You Reside in a Rented Flat in the Same City
This is pertinent to those who own a house but need to live in another part of the same city because of commuting hassles. In such instances, they might choose a rented accommodation closer to their place of work and yet qualify for both HRA and home loan concessions on their own property. However, you cannot let out your house on rent during this time. You also need to provide proof for availing rental residency due to employment reasons. Remember, if you put forth other reasons like children’s schooling, etc. your claim may not be considered.
3. You Rent Out Your Self-Owned House and Stay in Rented Premises in the Same City
Other than proximity to your place of work, there may be several other bonafide reasons not to reside in one’s own house and rent a flat instead. For instance, your own house may be too small to accommodate your whole family, or it may be too far from your children’s school or any other valid purpose. In such a scenario, you could claim both HRA and home loan exemptions for a self-owned property that is let out. Thus, you may expect exemptions only on the interest component of the house loan and not on the principal.
Also Read: Income Tax Slabs for Old and New Regime
*Terms and conditions apply.
