How to use Tax benefits on HRA and home loans

/ M. Pattabiraman / @pattufreefincal / 23 Comments

Published: May 9, 2020 at 9:53 am

House rent allowance (HRA) is an allowance that many employees in India receive, both in the public and private sectors. Many employees also have a home loan in their names. Tax benefits are available on both HRA and home loan. Let’s see how HRA and home loans can be used to reduce your tax outgo.

About the author: Anjesh Bharatiya is a 30+ taxman by profession and a Chemical Engineer by education. He has been an investor in the stock market since age 15! He likes to write about personal finance, stock markets, government policies, taxation, philosophy and football.

HRA Calculation:

            A salaried employee can claim tax exemption on HRA only if he is paying rent. The exemption will be based on the least of the below mentioned options:

  • The actual amount paid by the employer as the HRA.
  • Actual rent paid less 10% of the basic salary.
  • 50% of the basic salary, if the employee is staying in one of the four metro cities (40% for a non-metro city).

Salary in the above calculations is inclusive of dearness allowance while other allowances & prerequisites are not included.

Can you claim tax exemption on HRA if you are living with your parents?

            Yes. In case you stay with your parents, you can pay rent to them (provided the house is in their name) and collect a rent receipt for HRA claim. However, you cannot pay rent to your spouse and claim a tax exemption. The HRA benefit can also not be claimed if you are the joint owner of the property and paying rent to other owner(s).

Tax benefits on home loan

If you have availed a home loan, you will be paying an EMI to the financial institution. The EMI has two components – interest payment and principal repayment and both components are eligible for tax exemption. The interest payment can be entered as a deduction in the ‘Income from House Property’ column of your tax return. For a self-occupied house, interest payment of maximum Rs 2 lakh (on accrual basis) can be claimed as a deduction from your total income under Section 24 of the Income Tax Act.

For a property which is not self-occupied, there is no upper limit on the interest claim. Another thing to note is that in case the property is not self-occupied because the owner is residing at another place due to his occupation, the upper limit of deduction will be Rs 2 lakh only. The interest deduction can be claimed from the year in which the construction of the house is completed or the fully constructed house is purchased.

For the pre-construction period, the interest paid can be claimed in five equal instalments from the year in which the construction of the house is completed or the fully constructed house is purchased. However, the maximum loss that can be claimed remains Rs 2 lakh only. Moreover, if the property is not completely constructed/acquired within 5 years from the year in which the home loan was taken, the interest deduction will be capped at Rs 30000 only.

Loss from house property up to Rs 2 lakh can also be set-off against income under any other head and the remaining loss, if any, can be carried forward for a maximum of 8 assessment years (where it can be set-off only against income from house property).

The principal repayment can be claimed as a deduction under Section 80C (on payment basis and not accrual basis) subject to the overall upper limit of Rs 1.5 lakh under Section 80C, but only after completion of construction. Moreover, this can be claimed only if house property isn’t sold within 5 years from the year of completion of construction/acquisition.

Deduction for principal repayment under Section 80C can be claimed only for purchase/construction of a new house whereas the interest repayment deduction can be claimed for repair purposes also. Stamp Duty and Registration Charges can also be claimed as a deduction under Section 80C in the year in which these expenses were made.

If the home loan is taken jointly, then each of the loanees can claim a deduction for interest up to Rs 2 lakh each and principal repayment u/s 80C up to Rs 1.5 lakh each.

Additional tax benefits on home loan for first time buyers

For first time home buyers who have taken a home loan, interest repayment deduction of maximum Rs 1.5 lakh can be claimed under Section 80EEA over & above the Rs 2 lakh interest deduction available under Section 24. The two requirements for being eligible under this section are that the stamp value of the property purchased should be less than Rs 45 lakh and the loan should have been sanctioned between 1st April 2019 and 31st March 2021. This deduction is available from AY 2020-21 onward.

Benefits of deduction on home loan & HRA together

Tax exemption on home loan & HRA can be claimed together in the following instances:

  • If you own a house in one place but are residing in another place due to your occupation/job. The distance between your owned house and place of work shouldn’t be less than 35 km.
  • If your house is under construction and you are living in another house on rent. For this pre-construction period, the interest paid can be claimed in five equal installments as already explained above.
  • If you purchase a house through home loan but are unable to move in due to some compelling reason and are forced to live in a rented accommodation. In such cases, you should ensure that you have evidence in support of your justification readily available in case of any query raised by the tax department.
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