Claim Home Loan Tax Exemptions and HRA -Bannner_WC

Claim Home Loan Tax Exemptions and HRA _WC

6 min 21 Feb 2023
Claiming Home Loan Tax Exemptions and HRA
Highlights
  • What Are Home Loan Tax Benefits?
  • What is House Rent Allowance (HRA)?
  • Is It Possible to Claim Home Loan Tax and HRA Tax Benefits Together?
  • Different Scenarios in Which You Can Claim Both Home Loan and HRA Tax Benefits
  • Total Amount of Deduction a Person Can Claim Under Home Loan and HRA

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 tax breaks is to provide financial relief to homeowners and encourage them to invest in real estate. The following are the tax breaks available to Home Loan borrowers: 

1.Tax Deduction for Home Loan Interest: 

Under Section 24 of the Income Tax Act of 1961, borrowers can claim a Home Loan tax exemption of up to Rs.2 Lakh on the interest paid on their Home Loan. 

2.Tax Deduction for Home Loan Principal Repayment:

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

3.Tax Benefits on a Second Home Loan:

If a person takes out a second Home Loan to buy a new home, they can claim tax benefits on second home loan as well as 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, and 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 of 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 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 job and face significant rent expenses. By allowing tax breaks on HRA, the government encourages employees to live in rented housing while alleviating the financial burden of high rental costs. 

Is It Possible to Claim Home Loan Tax 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 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 of the Indian Income Tax Act, 1961. In addition, the employee's HRA is tax-free to the extent specified in Section 10(13A) of the Income Tax Act of 1961. 

Here Are 4 Different 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 a person owns a home in one city but lives in another, they 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 a person owns a home in one city but lives in another, they can still claim tax benefits on both the Home Loan and the House Rent Allowance (HRA) received as part of their salary. However, if the individual's own home is in the same city as their 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 a person owns a home in one city and rents it out, but lives in another, they can still claim tax benefits on both the Home Loan and the House Rent Allowance (HRA) received as part of their salary. 

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

If a person has a home under construction but lives in a rented house elsewhere, they can still claim tax benefits on the Home Loan and the House Rent Allowance (HRA) that they receive as part of their salary. This deduction is available for self-occupied properties, and 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 That a Person Can Claim Under 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 of 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. 

Here's an example of how to do the calculation:

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 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 

FAQs_WC

FAQs

You cannot claim an exemption on HRA if you are staying in your own House. However, if you own a house in one city and live on rent in another, you can certainly claim. In case where your house and rented accommodation are both in the same city, you can still claim HRA provided your place of work is far from home and you have to stay in a rented accommodation near your workplace.

Yes, you can claim both.

Yes, it is mandatory to provide the PAN details of your landlord.

The maximum HRA you can claim is the minimum of the following:

  1. Actual HRA received

  2. Rent paid annually reduced by 10% of salary

  3. 50% of your basic salary (if you live in a metro city)

  4. 40% of your basic salary (if you live in a non-metro city)

You can claim HRA tax exemption and Home Loan tax deduction together if you meet certain conditions.

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