Many of us are aware that interest on home loan enjoys tax benefits, but only few might know that House Rent
Allowance, a
component in your salary, could also be a big tax saver if it is combined with
the home loan benefit.
House Rent
Allowance (HRA) is explained u/s 10(13A)
of the Income Tax Act while Interest on borrowed capital for acquisition or
construction of house property is explained u/s 24(b) of the Income Tax Act. The deduction for payment of
principal component of such home loan is granted under section 80C of Deduction under Chapter
VI of the Income Tax Act. The above sections are all together different and has
no interlink with each. One can claim both HRA and interest on home loan
irrespective of the place of stay and office until and unless he satisfies the
necessary conditions to claim such deduction or exemption.
HRA is given by the employer to the employee to meet the expenses in
connection with the rent of the accommodation which the employee might have to
take for the residential purpose. The House Rent Allowance so paid by the
employer to his employees is taxable under the head “Income from Salaries” to
the extent it is not exempt u/s 10(13A). The employee must not be the owner of
the property.
In order to
claim the deduction, the employee must
- Receive HRA as a part of his salary income subject to tax,
- Actually pay rent for the premises he occupies, and
- Not be the owner of the premises he is paying rent for.
The amount of
allowance is the lowest of the following three limits:
- Rent paid less 10 per cent of salary.
- An amount equal to 50% of the Salary (where the residential house is situated in Mumbai, Kolkata, Delhi, Chennai) (or) 40% of the salary where the residential house is situated in any other place.
- The actual amount of allowance received in the relevant period during which the rental accommodation was occupied by the employee during the previous year.
If a person
takes a loan for acquisition or construction of a house property then he can
claim tax benefits. Housing loan consists of two components one is interest
portion and other principal amount. The interest paid towards home loan is
treated as an ‘expense’ under ‘Income from house property’ and can be claimed
u/s 24(b) irrespective of the house being self occupied or let-out.
·
- If the house is self occupied, he maximum limit under this section is Rs.1,50,000 and assessee don’t have to actually live in the house to claim this benefit.
- If the house is let-out, there is no such maximum limit that can be claimed.
The interest
payment is deducted from the assesses taxable income thus reducing tax
liability. There is no limit on the number of houses as well as the location of
the houses that assessee can claim. One can even claim deductions for interest
on housing loan for both let-out and self occupied.
Maximum tax
deduction for repayment principal component of home loan can’t exceed Rs.1,
00,000 under section 80C. One should keep in mind that other
investments/contributions are also allowed as a deduction under section 80C,
and this limit of Rs.1, 00,000 applies to all of them put together
Analysis of below scenarios points out the
possibilities of taking maximum advantage of HRA and home loan.
Situation 1: Self-Occupied House – If you reside in the same house for which you have
taken the loan, then HRA cannot be claimed for it, but, principal repayment and
interest payment under Sections 80C and 24 can be claimed
respectively.
Situation 2: House owned in
another city – It is common in
India, people take home loan for home owned in their native city while they
continue to reside in rental accommodation in a different city, due to work or
other similar factors. Here, a person is eligible to claim HRA as well as
principal and interest repayment.
Situation 3: House owned in a
city where you work- If the home loan is taken for a property owned in a city where you work
then still you can claim HRA in these possible conditions.
a) Home under-construction- If you
are compelled to live in a rental home as the home for which you have taken
loan is still under-construction, then you are eligible to claim HRA and
principal repayment before completion of the house. However, Interest repayment
can only be claimed in five equal instalments in the financial year in which
construction is complete and house is ready to use. HRA could not be claimed
post-construction of the house.
b) House ready to use but cannot be occupied due
to genuine reasons - House brought in the same city
as work but cannot be occupied due to valid reasons like house being
very far from work place, etc. then Income tax act permits one to claim HRA as
well as home loan benefits.
However, the tax liability will arise on notional rent
even if the house remains vacant.
c) Rented own house and residing in a rented
house - If a ready to use home for which home loan is taken is
rented out to someone else, while you continue to reside in a rental
accommodation then HRA along with the home loan benefits could be claimed.
On the other hand, since you are recipient of rental
income, then the tax would be applicable to the rental income received.
Hence, in specific cases an individual can claim both HRA and home loan benefits together. Also, employers do
have regulations in this regard, therefore, it is wise and advisable to cross
check with the employer before you claim HRA and home loan benefits together. I
hope this would clarify some your doubts regarding HRA combined with Home loan.
