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Tax Aspects of HRA and Home Loan

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tax aspects of hra and home loan

Buying a home is a dream come true for many , but a bit of homework could reduce your tax liability enormously. Many of us are aware that interest on home loan enjoys tax benefits, but only few might know that House Rent Allowance, a component in your salary, could also be a big tax saver if it is combined with the home loan benefit.

House rent allowance (HRA) and home loan come under different sections of the Income tax act and operate independent of each other. While the former is dealt with under Section 10 (13A) Rule 2A and is claimed based on certain situations, the latter derives benefits under Section 80 C (Principal repayment) and under Section 24 (home loan interest payment) of Income Tax Act.

Before moving ahead, it is important to reiterate that House rent allowance can be claimed if:

  • The employee receives HRA as a component of his salary
  • The employee is not the owner of the property for which he is claiming HRA
  • The employee actually pays rent for the house he occupies as tenant and a valid rental agreement is present

Analysis of below scenarios points out the possibilities of taking maximum advantage of HRA and home loan.

Situation 1: Self-Occupied House

– If you reside in the same house for which you have taken the loan, then HRA cannot be claimed for it, but, principal repayment and interest payment under Sections 80C and 24 can be claimed respectively.

Situation 2: House owned in another city

– It is common in India, people take home loan for home owned in their native city while they continue to reside in rental accommodation in a different city, due to work or other similar factors. Here, a person is eligible to claim HRA as well as principal and interest repayment.

Situation 3: House owned in a city where you work

If the home loan is taken for a property owned in a city where you work then still you can claim HRA in these possible conditions.

A) Home under-construction

If you are compelled to live in a rental home as the home for which you have taken loan is still under-construction, then you are eligible to claim HRA and principal repayment before completion of the house. However, Interest repayment can only be claimed in five equal instalments in the financial year in which construction is complete and house is ready to use. HRA could not be claimed post-construction of the house.

B) House ready to use but cannot be occupied due to genuine reasons

House brought in the same city as work but cannot be occupied due to valid reasons like house being very far from work place, etc. then Income tax act permits one to claim HRA as well as home loan benefits.

However, the tax liability will arise on notional rent even if the house remains vacant.

C)  Rented own house and residing in a rented house

If a ready to use home for which home loan is taken is rented out to someone else, while you continue to reside in a rental accommodation then HRA along with the home loan benefits could be claimed.

On the other hand, since you are recipient of rental income, then the tax would be applicable to the rental income received.

Hence, in specific cases an individual can claim both HRA and home loan benefits together. Also, employers do have regulations in this regard, therefore, it is wise and advisable to cross check with the employer before you claim HRA and home loan benefits together. I hope this would clarify some your doubts regarding HRA combined with Home loan.

  • Yogi Cfp

    Q. Hello, I am getting home possession in month of Jan or Feb 2014. presently i am staying in rented house.This year can I show HRA and Home loan interest both for tax deduction. Can you answer how can I save tax this year?

    A. Yes, you can claim both HRA as well as home loan interest. HRA will depend on how many months of rent you have paid. Home loan interest deduction for property after possession can be claimed in the form of pre-emi in 5 installments spread equally over 5 years. You can also claim the actual interest part of EMI from now on.

    • Yogi Cfp

      Q. This is regarding the financial year 2013-14. i am planning to move into my own house in feb 2014, currently residing in rental house. Can I claim for both HRA and benefit for home loan interest , if yes what would be the interest limit (150000 rs) , will HRA be claimed for whole 12 months?
      A. HRA can be claimed for the period you have resided in the rented house. Interest limit would be Rs. 1,50,000 since it is a self occupied property. Apart from this, you can also claim the 1/5th of pre-emi for the under construction property this year.

  • satish

    How do i claim refund (in 5 equal instalments) under section 24 for the Pre-emi interest, while filing my tax return using ITR-1?

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