Introduction 

Every salaried taxpayer often wonders if the Income Tax Act allows him or her to claim a deduction for HRA and also for interest on home loan. The answer is that he or she can claim tax benefits on both home loan and HRA in the same financial year.

What is HRA & Home Loan Interest

House Rent Allowance or HRA is a part of the salary provided by an employer to the employee for his or her rented accommodation. HRA exemption can be claimed only if the employee is residing in a rented house. It comes under Section 10 and the exemption from tax can be claimed partially or fully. HRA is a useful allocation of your salary component to save tax.

Home Loan Interest is the interest to be paid on money borrowed for purchasing or building a home. Home loan interest also falls under the tax exemption bracket and is generally claimed by taxpayers for gaining tax benefits. 

Role of HRA and Home Loan Interest in Tax Deductions and Exemptions

Every taxpayer would generally be aware that house rent allowance (HRA) and the deduction related to home loan repayment can lower his or her tax liability. In certain cases, they can avail tax benefits from both of these. 

HRA exemption can be claimed under section 10(13A) of the Income-tax Act, 1961. To calculate this exempted amount, the lowest of these three is considered:

1) Actual HRA received from the employer

2) 50% of salary if an employee lives in a metro city, and 40% if the employee lives in a city other than a metro

3) Actual rent paid minus 10% of salary (basic plus dearness allowance plus turnover-based commission)

Home loan tax benefits are calculated in a different manner. In case of a home loan, the deduction on principal repayment can be claimed under section 80C of the income-tax Act, up to the threshold limit Rs. 1.5 lakh, or the actual principal repaid—whichever is less. The benefit on the interest portion of the loan repayment can be claimed up to the threshold limit of Rs 2 lakhs, under section 24b of the Act.

Can Both HRA & Home Loan Deduction be Claimed?

A taxpayer can claim HRA exemption as well as the deduction for home loan repayment if he or she owns a house, which has a home loan and lives in another house on rent. 

Possible Conditions to Claim Both

  • The caveat is, the house the individual owns and the one he or she lives in should be in different cities, and the individual should have a good reason for not living where he or she owns the house. The reasons for this could be that individual works in a different city, or even that his or her office is too far from the house, in case the house is in a distant suburb of the city. A taxpayer, in such cases, may need to provide these explanations to the employer or the income-tax authority in case there is a scrutiny of the details provided by him or her.

  • The taxpayer can also claim both these benefits if he or she takes a home loan to buy a house that is under construction, and during the period of construction he or she lives in a rented house. In this case, he or she can claim the HRA exemption as well as the home loan deduction for that period. 

  • It is important to note that the home loan deduction benefit can only be claimed for payment of interest component of the loan, and not for principal repayment. Also, an individual can claim it in five equal instalments over the years, after getting possession of the house.

  • The third case in which one can claim both the benefits is when one has rented out the house on which he or she has a home loan, and prefer to live in another house on rent. The reason for doing so could be that the house one owns does not suit individual needs, possibly because it is too small. In this case too, one can claim both HRA exemption and the home loan deduction, but at the same time, one will have to disclose the rental income that one earns from the let-out property.

Examples

Rahul lives in Delhi in a rented apartment that costs him Rs. 15,000 per month. His basic salary is Rs 40,000 and HRA is Rs 15,000. He also took a home loan to buy a house in Mumbai where his family lives. The interest he pays on the loan for his house is Rs 30,000 per month.

Rahul can claim HRA Tax Deduction as follows. The amount that is exempt to be taxed from HRA will be the minimum of the following three:

  • HRA received = Rs. 15,000

  • 40% of the basic salary = Rs. 16,000

  • Rent paid – 10% of Basic = Rs.15,000 – Rs. 4,000 = Rs. 11,000

The amount Rs. 11,000 will be exempted from HRA tax deduction as it is the lowest of the above. Thus, Rs. 4,000 (Rs. 15,000 – Rs. 11,000 = Rs. 4,000) will form the part of his taxable income.

Rahul can claim the Home Loan Tax Deduction as follows. 

  • As per Section 24 of the Income Tax Act, home loan borrowers individually can claim tax benefit of up to Rs. 2 lakhs per financial year (FY) on the Home Loan interest.

  • As per Section 80C of the Income Tax Act, home loan borrowers solely can claim tax benefits of up to Rs. 1.5 lakh per FY on the repayment of the home loan principal amount.

End Note

HRA and deduction on home loan interest can save a good amount of money for any taxpayer. This is, provided he or she has the knowledge and information to go about claiming the exemptions and deductions. It is important to be aware of some of the basic Income Tax laws to ensure that tax payment takes place in the right way without incurring any form of loss or missing out on necessary payments.