How to Claim Home Loan Tax Exemptions and HRA Together?

What are Home Loan Tax Benefits?

Home Loan tax benefits are tax exemptions that a homeowner can get on the interest paid on their mortgage. The primary goal of these exemptions is to provide financial relief to homeowners and encourage them to invest in real estate. The following are the tax benefits available to Home Loan borrowers: 

1. Tax Deduction for Home Loan Interest: 

Under Section 24(b) of the Income Tax Act, 1961, you can claim a Home Loan tax exemption of up to Rs.2 Lakh on the interest paid on your Home Loan. 

2. Tax Deduction for Home Loan Principal Repayment:

You can claim a tax deduction of up to Rs.1.5 Lakh on the principal repayment of your Home Loan under Section 80C of the Income Tax Act, 1961. 

3. Tax Benefits on a Second Home Loan:

If you avail of a second Home Loan to buy a new home, you can claim tax benefits on the second Home Loan as well as the first Home Loan. 

What is House Rent Allowance (HRA)?

House Rent Allowance (HRA) is a type of compensation given to employees by their employers to help them cover the cost of renting a home. The HRA is a taxable component of an employee's salary. The amount of HRA received is used to calculate taxable income. 

The HRA is calculated as a percentage of an employee's basic salary, depending on where they live. The percentage of HRA varies according to location and cost of living. HRA is a taxable benefit and the employee must pay tax on the amount received. Employees can, however, claim tax exemptions on the HRA received if they provide proof of rent paid to the relevant tax authorities. 

It should be noted that the HRA only applies to salaried employees and not to self-employed individuals. Furthermore, the HRA is only applicable if the employee rents rather than owns a home. 

Section 10(13A) of the Income Tax Act, 1961 determines the House Rent Allowance (HRA). According to this section, an employee's HRA is tax-free to the extent of the least of the following: 

• The employee's actual HRA
• The rent paid less than 10% of the basic salary
• 50% of the basic salary for those living in metropolitan cities (Mumbai, Delhi, Kolkata, and Chennai) and 40% for those living in other cities

The purpose of this section is to provide assistance to employees who are required to live in rented housing as part of their jobs and face significant rent expenses. By allowing tax breaks on HRA, the government encourages employees to live in rented housing while alleviating the financial obligation of high rental costs. 

Is it Possible to Claim Home Loan and HRA Tax Benefits Together?

Yes, it is possible to claim both Home Loan tax benefits and HRA tax benefits. A person who pays a Home Loan and receives a House Rent Allowance (HRA) as part of their salary can claim tax benefits on both. 

Individuals can claim a tax deduction on Home Loan interest paid up to Rs.2 Lakh under Section 24(b) of the Indian Income Tax Act, 1961. In addition, the employee's HRA is tax-free to the extent specified in Section 10(13A). 

Scenarios in which You Can Claim both Home Loan and HRA Tax Benefits 

1. You own a home in one city but live on rent in another city

If you own a home in one city but live in another, you can still claim tax benefits on both the Home Loan and the House Rent Allowance (HRA) they receive as part of their salary.  

2. You own a home in one city and live on rent in the same city

If you own a home in one city but live in another, you can still claim tax benefits on both the Home Loan and the House Rent Allowance (HRA) received as part of your salary. However, if you own a home in the same city as your rented accommodation, the HRA exemption may be limited because the individual is not required to pay rent for their own home. In such cases, the HRA exemption is limited to the bare necessities: 

• The total amount of HRA received 

• Those living in metro cities (Delhi, Mumbai, Kolkata, and Chennai) will receive 50% of the basic salary, while those living in non-metro cities will receive 40%.

3. You rent out your own home and live in the same city

If you own a home in one city and rent it out, but live in another, you can still claim tax benefits on both the Home Loan and HRA received as part of your salary. 

4. Your home is under construction and you live on rent elsewhere

If you have a home under construction but live in a rented house elsewhere, you can still claim tax benefits on the Home Loan and HRA. This deduction is available for self-occupied properties. In the case of a home under construction, the individual can claim the deduction once the construction is finished and the property is ready for occupancy. 

Also Read: 10 Useful Income Tax Deductions 

What is the Total Amount of Deduction One Can Claim Under a Home Loan and HRA? 

The total amount of benefit that an individual can claim from HRA and Home Loan tax deductions is subject to the provisions of the Income Tax Act, 1961 and other applicable tax laws. The exact amount of benefit will be determined by a number of factors, including the individual's salary, the amount of interest paid on the Home Loan, the rent paid, the location of the rented accommodation, and the type of property. 

Example of Tax Deduction Calculation 

Here’s an example of how to calculate the tax deduction.  

Assume an individual earns Rs.10 Lakh per year and pays Rs.2 Lakh in rent. Additionally, the individual has a Home Loan with an annual interest payment of Rs.2 Lakh. The individual can claim a tax deduction of Rs.2 Lakh (the maximum allowed under Section 24(b) of the Income Tax Act, 1961) on the interest paid on the Home Loan. The HRA exemption is calculated as the lesser of the following: 

• Individuals living in metropolitan cities will receive 50% of their basic salary (Rs.5 Lakh) 

• Individuals living in non-metropolitan cities are entitled to 40% of their basic salary (Rs.4 Lakh) 

• HRA received in full (Rs.2 Lakh) 

So, the total amount of tax deductions that the individual can claim is Rs.2 Lakh (for the Home Loan interest) + Rs.2 Lakh (for the total HRA exemption) = Individuals can claim a combined tax benefit of Rs.4 Lakh. 

Also Read: Know About Tax Savings When Availing a Home Loan