How to claim HRA and home loan benefits together, With Automated 100 Employees Master of Form 16 Part B for F.Y.2018-19

It is the most asked question by any salaried person and believes me it is very important to know the conditions that when you can claim tax benefits only of HRA or of home loan or both. So below is a comprehensive article covering all aspects of taxation on a home loan with HRA.

First of all, the answer to the above question is simple YES.

Yes, you can enjoy the tax benefits of home loan with HRA, as there is no relationship between claiming HRA tax exemption and claiming interest on the home loan as both have independent provisions in Income Tax Act.

Let us dive into the sections governs HRA and Home Loan.

Conditions for HRA exemption

House Rent Allowance (HRA) exemption is granted under section 10(13A) of the Income Tax Act. It says that any employee who is in receipt of any allowance by his employer for payment of rent for his residential accommodation, irrespective of what it is termed (HRA) is exempt from his annual income. This means the HRA component is not to be added to total income for income tax computation.

Further reading of Section 10(13A) clarifies that this exemption will not be available if assessee lives in a house owned by him or is not actually paying any rent. Even if he has part ownership in the house, no HRA exemption can be claimed.

Rule 2A of Income Tax Act which governs HRA exemption says the exemption is to be taken as the lowest of the below 3 options:

  • Actual House Rent Allowance (HRA)
  • Rent paid minus 10% of basic salary
  • 50% of basic salary

Elementary deduction from the above clause is that, if the rent paid is less than 10% of basic salary, HRA exemption cannot be claimed.

Better Understanding with Simple Example:

Sanyam earns a basic salary of Rs. 50,000 per month and has taken an apartment on rent in Mumbai for Rs. 25,000 per month. The actual HRA he receives is Rs. 15,000. These values are considered to find out his HRA tax exemption:

  1. Actual HRA allowance from the employer, i.e. Rs. 15,000,
  2. Fifty percent of the basic salary as he resides in a metro (else 40 percent), i.e. Rs. 25,000, and,
  3. The actual rent he pays for the house from which 10 percent of his basic pay is deducted, i.e. Rs. 25,000 – Rs. 5,000 = Rs. 20,000

The value considered for his actual HRA exemption will be the least value of the above figures. Hence, the taxable HRA amount for Sanyam per month will be Rs. 25,000- 15,000 (available HRA deduction) = Rs.10,000.

Conditions for home loan interest deduction

Section 24(b) deals with home loan interest deduction, states that if any assessee has borrowed any amount (even from relatives or friends) for buying, building, renewing, repairing or reconstructing a house, he is eligible to claim the interest payable in that year for income tax deduction. In simple words interest payable is deductible from income from house property.

Unlike HRA even you hold part of a house i.e. joint or co-owner and Joint-loan borrower, you are eligible to claim this deduction up to your share in the loan.

No provision of this section will be violated if you are claiming HRA or any other tax benefit. This section only stipulates a condition that an assessee cannot have more than one self-occupied property means in case of self-occupied property where the value is taken to be nil, the owner should not be living in an owned house in another place where he usually resides for his employment or business purpose. You can claim that another place could be elsewhere in the same city, town or locality.

Simple Example for Better Understanding

Sanyam had purchased an apartment in Kolkata for Rs. 40 lakh three years back with the aid of a home loan of Rs. 34 lakh. He has repaid an interest of Rs. 2.3 lakh and a principal amount of Rs. 80,000 in the current year.

Section 80C allows tax rebate on home loan principal repayment up to a limit of Rs.1 lakh (including other benefits) and Section 24(b) on interest up to a limit of Rs. 1.5 lakh. So Sanyam can utilize up to Rs.1.5 lakhs on his interest paid and avail the tax benefits in full for the amount paid towards the principal of Rs. 80,000.

Claim tax benefits on both HRA and home loan interest payment

Let us analyze various possible situations an individual can find himself in and understand what he can do without going against any provision mentioned in the Income Tax Act regarding HRA and Home Loan:

1: You live in your own house

Since you are residing in your own house there will be no HRA in this case but you are eligible to claim tax benefits on both the principal repayment of loan u/s 80C as well as interest on home loan u/s 24(b).

2:  You own a house in another city

In case your own house and the house you are residing in are in different cities then you will be entitled to HRA exemption and tax benefits on both, the principal and interest repaid on the home loan.

3: Your house cannot be occupied at this point (e.g. under construction)

In such a case, you are eligible to claim HRA. Coming on to tax benefits on the home loan, you are eligible to claim tax benefits only for the principal repayment until the completion of your house. Once your house gets completed, you become eligible to claim tax benefits on the total interest paid up to the date of completion in five equal installments in five years beginning from the year of completion.

4:  You have a house which is ready for occupation but you cannot reside in it

Say your house is very far from your working place, in such cases, the Income-tax act permits the individual to claim HRA and home loan benefits which includes both principal and interest repaid on the home loan.

Also, remember that if your house remains vacant, then you will still need to pay tax on a notional rent income.

5:  You have rented your own house and currently residing in a rented house

You own a house but you are still residing in a rented house due to some reason.  The Income Tax Act permits you to claim both HRA and home loan benefits.

However, in such a case, since you are the recipient of rent because you have let out your own house, that income is taxable at your hands under the head Income from House Property.

6 You have rented your house and residing with your parents

If you are staying on rent in a place belonging to a relative, say parents or siblings and you own another house for which EMIs are being paid. You can still get both tax rebates. Just make sure that your parents or siblings are filing I-T returns.

7. You live in a house owned by your spouse and paying rent to him/her

This case is a sham transaction in the eyes of the Income-Tax Act because there is no commercial interest between spouses unless they are living apart. Although one can contend that Income Tax laws do not prohibit claiming HRA benefit in this case. But in most of the cases, no tax benefits of HRA can be claimed in this case.

Download Automated 100 employees Master of Form 16 Part B for Financial Year 2018-19 [ This Excel Utility can prepare at a time 100 employees Form 16 Part B for F.Y. 2018-19 ]

Main Feature of this Excel Utility are:-

1) All the Income Tax Section has in this Excel Utility as amended by the Finance Budget 2018-19.

2) This Excel Utility can prepare at a time 100 employees Form 16 Part B for F.Y.2018-19 with the new deduction of Standard Deduction Rs. 40,000/-

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