Income Tax

Can You Claim Both HRA And Deduction On Home Loan Interest?

Can You Claim Both HRA And Deduction On Home Loan Interest

General confusion among the salaried arises regarding whether they will forego the exemption benefit of the House Rent Allowance received from the employer to claim a deduction of interest on their home loan. A short answer to this is NO. One may claim both HRA exemption and interest deduction on a home loan subject to the condition that certain requirements, as per the Income Tax Act, 1961, are met. In this article, we aim to offer a detailed explanation regarding all possible scenarios and the amount one can claim, both HRA exemption and interest deduction on a home loan.

What is HRA?

HRA (House Rent Allowance) is a special allowance paid by an employer as a part of one’s salary to meet the rental expenses of accommodation in a city.

Conditions for Claiming HRA Exemption

Under both the new and old regime of the Act, HRA is fully taxable in the employee’s hands. However, in the old regime, he may claim exemption of such an allowance under Section 10(13A) of the Act to lower their taxes if all the following conditions are fulfilled:-

  1. The taxpayer should be a salaried employee
  2. HRA is given as a part of the salary
  3. The taxpayer must reside in rented accommodation
  4. Rent receipts or rental agreement is given to the employer
  5. If rent paid by the employee is greater than INR 1,00,000 per annum, he must give the landlord’s PAN to his employer. In the absence of PAN, the landlord must provide a declaration to this effect, which the employee should file with his employer.
  6. If the landlord is a Non-resident Indian, a tax of 31.2% (base rate of 30% plus a cess of 4%) has to be reduced at the source before making the rent payment.

Maximum HRA exemption one can claim

The taxpayer receives only a partial exemption in respect of the HRA received. The HRA exemption available will be the least of the following:-

  1. Actual allowance received for the relevant period or
  2. Rent paid is 10% of the salary for the relevant period; or
  3. For the relevant period, 40% of salary and 50% for rented accommodation in Delhi/Mumbai/Kolkata/Chennai).
READ  Section 13 under Income Tax Act, 1961

The “Relevant Period” means the period during which the taxpayer occupied the said accommodation during the year. If a person occupies different accommodations for different periods, we split the year into parts and then calculate the exemption for such parts separately.

Tax Benefits on Home Loans

Where a taxpayer is serving a home loan for the acquisition or construction of a house property, the taxpayer is eligible to avail various tax benefits such as tax deduction on:-

  1. Under section 80C of the Act – Principal repayment of home loan,
  2. Payment of interest under section 24(b) of the Act, and
  3. Under section 80EEA or 80EE of the Act- Payment of interest.
Tax deductionAmount of BenefitProvision under the Act
Principal repayment of the loan (includes any pre-payment amount)Up to INR 1.5 lacs80C
Interest PaymentRented property: Actual Interest with no limit Self-occupied property: INR 2 lacs or INR 30,000 if certain conditions prescribed are not met.24(b)
Interest PaymentINR 50,000 or INR 1.5 lacs80EE or 80EEA respectively

Tax Deduction on principal repayment of loan

The maximum deduction a taxpayer can claim regarding principal repayment of a loan for construction or purchase of a house property is INR 1.5 lakhs. Stamp duty and registration charges may also be claimed under the same limit only once for that particular loan.

Note: When the taxpayer sells or transfers the house prior to the expiry of five years from the end of the Fiscal Year(FY)1 in which the construction was completed or the purchase was made, the deductions allowed previously will be summed up to his income in the year of sale.

Tax Deductions on interest under section 24(b) of the Act

A taxpayer can claim a deduction on interest paid or payable regarding a home loan as per section 24(b) of the Act. Such a deduction is permitted on an accrual basis, even if the interest is not actually paid. Interest includes pre-payment charges, brokerage, service fees, commission, etc. However, interest on unpaid interest or penalty will not be allowed to be deducted.

READ  Section 30 of the Income Tax Act: Deductions for Rent, Rates, Taxes, Repairs, and Insurance

The maximum amount of deduction available is as follows:-

  • For under-construction property

The interest paid during construction shall disallowed till the year construction is completed. The pre-construction interest will be allowed in 5 equal instalments from the FY in which construction or purchase is completed.

For instance, Mr. X took a loan of INR 10 lakhs in May 2017. Interest payable amounted to INR 10,000 per month. The construction was completed in May 2021. IN THOSE YEARS, Mr A was ineligible to claim a deduction of interest paid from May 2017 to May 2021. However, he will be eligible to claim a deduction of INR 94,000 from FY 2021-22 to 25-26 (i.e., total interest payment of INR 4.7 lakhs from May 2017 to March 2021 in 5 equal instalments.

  • Any other case (I.e., entirely constructed or purchase of ‘ready to move-in homes):-
Type of House Property as per the Income Tax ActMaximum deduction that can be availed
Rented PropertyThe actual interest paid. But, a maximum loss of INR 2 lakhs can be set off. Further, the balance will be carried forward.
Self-occupied property: Loan serviced for Acquisition/ConstructionINR 2 lakhs subject to the fulfilment of all conditions specified below.
Self-occupied property: Loan services for repairs, renewals, or reconstructionIf the conditions specified below are not fulfilled  INR 30,000
Deemed let out propertyINR 2 lakhs provided all the conditions specified below are fulfilled.

The limit of INR 2 Lakhs shall be reduced to INR 30,000 if any of the following conditions are not fulfilled:-

  1. The home loan taken must be for either the purchase or construction of a house property;
  2. The loan must be taken on or after 1st April 1999;
  3. The purchase or construction should be completed within the timeline of five years. The five-year period should be counted from the end of the FY in which the loan was taken.
READ  A Comprеhеnsivе Guidе on Sеction 41 of thе Incomе Tax Act, 1961

The government has provided significant relief through the Finance Act 2019, which allowed the taxpayers to declare two house properties as self-occupied. Thus, a taxpayer can now claim an interest deduction regarding a home loan for up to two properties.

Note: The deduction is available depending on the taxpayer and not on the property, i.e., if a taxpayer owns two properties, the deduction will be available to a taxpayer as per the limits given above. The limit is available for both properties cumulatively. Therefore, in the case of joint ownership in house properties, every person paying interest or repaying the principal amount will be eligible to claim the entire deduction of the amount paid.

Interest payment under section 80EE or 80EEA of the Act

The government introduced sections 80EE and 80EEA for first-time home buyers to incentivise house purchases. Deduction of interest paid on housing loan is allowed above section 24(b) deduction, as explained earlier. The comparisons of benefits under both these sections are tabulated below:-

Particulars80EE80EEA
Eligible taxpayers who can claim the benefits of the sectionIndividuals, i.e., partnership firms, HUF, Companies, AOP, BOIs, etc., cannot claim the benefits under this section.Individuals that to those who are ineligible to claim deduction under section 80EE.
Deduction grantedActual interest or INR 50,000, whichever is less.Actual interest or INR 1.5 lakh, whichever is less.
The loan sanction period covered1st April 2016 to 31st March 20171st April 2019 to 31st March 2022
Amount of LoanUpto INR 35 lakhsNot mentioned
Stamp Duty value of the propertyUp to INR 50 lakhsUpto INR 45 lakhs
Source of loanFinancial Institution
PurposeAcquisition of residential property
Other conditionsThe assessee should not be in possession of any other residential property on the date of sanction of the loan.
Lock-in-period (period for which one cannot sell the said house property)None

Claim both HRA exemption and interest on home loan

An employee can claim both HRA and interest on a home loan as both these provisions are independent. Possible scenarios that may come up and whether the Act allows the taxpayer to claim the benefit of both:

ScenarioCan the taxpayer avail of both HRA exemption and deduction of interest on the home loan?
Where the taxpayer is the owner of a house property but resides in a rented house in a different city owning to work or any other reasonYes
Where the taxpayer is the owner of a house property regarding which he has serviced a home loan but resides in a rented house in the same city owning to work, or any justifiable other reasonYes The distance between his own house and his workplace should be required to be at least 35 km.
When the taxpayer’s house is under construction, and he is living in a rented house.Yes. However, the taxpayer is liable to claim the interest deduction of an under-construction property in the coming five years in equal instalments commencing from the year construction is completed.
When you are renting your own house and living on rented property elsewhereYes Note: You are required to show rental receipts of your own house while calculating the tax liability.

Exemption under section 80GG

An individual who is not receiving HRA as part of his salary and living in a rented house can claim the same benefit under Section 80GG regarding rental payments. However, in such cases, the taxpayer shall not claim HRA exemption under section 10(13A). To avail of the benefit of Section 80GG, the taxpayer is required to fulfil the following conditions:-

  1. The taxpayer must be an individual or HUF
  2. Individuals who are either salaried or self-employed can claim the benefit under this section.
  3. The taxpayer or his spouse or minor child or HUF do not have in possession any residential property in the city where he or she resides or performs duties related to office or employment/carried on business or profession.
  4. The taxpayer does not have self-occupied property at any place.
  5. The taxpayer has to file a declaration under Form No 10BA that his/her spouse or minor child or HUF does not have in their possession any residential property at any place mentioned above. Also, it does not own such property at any other location.
  6. The maximum amount of deduction available shall be the lowest of the following;

Conclusion

In summation, it can be said that homeowners paying back their home loan and getting HRA as a portion of their salary can avail of both deductions subject to the prescribed conditions.

References

  1. https://en.wikipedia.org/wiki/Fiscal_year

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