The Government of India has extended multiple deduction options for taxpayers in different segments. To enable housing for all, the interest paid on the home loan is exempt from Income tax calculation. Also, to reduce the tax burden on salaried employees, House Rent Allowance (HRA) to a certain extent depending on the place of residence is exempt from taxation as well.
With multiple tax exemptions available, it becomes a question of whether both of them can be claimed at the same time. There is room for a lot of confusion regarding tax compliance. But, in regard to our topic today, House Rent Allowance (HRA) and Interest on Home Loan tax exemptions are possible, and here is some information to highlight the topic.
Subject to certain conditions, the taxpayer claims exemptions on both HRA and Home Loan Interest under the Income Tax Act, of 1961.
House rent Allowance (HRA)
A part of the salary of an employee is towards the rented accommodation cost. The salary of both Public and Private Organizations is composed of different parts with different allocations. Similarly, House Rent Allowance is a part of the salary of an individual. HRA might be fixed or maybe a percentage of the basic salary. Under the Income Tax Act section 10-13A, HRA is exempt from taxation. The value of the deduction will be decided among the lowest of these.
- The actual HRA is provided by the employer.
- If residing in Metro city, 50% of the salary is exempt as HRA.
- If residing in a Non-metro city, 40% of the salary is exempt.
- Actual annual rent minus 10% of the salary.
The lowest of the above cases will be exempt from Income tax.
Conditions for HRA tax exemption
- HRA tax benefit is applicable only on the months for which the rent is paid not the entire year.
- One must not be the owner of the property for which HRA is claimed.
- There must be an incurred expenditure towards the rent.
- One must be a salaried employee.
Home loan Interest
A home Loan is a secured credit product offered by Banks and Non-banking Finance Companies (NBFCs) solely for the purpose of funding an individual’s home purchase. Different lenders offer loans at varying rates to applicants based on their credit size and eligibility. Above all interest liability, the borrower is exempt from income tax for the money paid back as interest.
If a home is purchased through Home Loan, one can claim an exemption on
- Interest on Home Loan
- Principal Repayment
- Stamp duty and registration during purchase.
The benefit is only applicable to the purchase of a Home or the construction of a Residential property.
Conditions for Home Loan Interest for deduction
- The taxpayer must be the legal owner of the house.
- Principal repayment deduction upto Rs.1.5 lakhs provided the house is not resold within 5 years of possession.
- Deduction of Home Loan interest is capped at Rs.2 lakh is personally occupied and the claim can be made only after possession or the construction of the house.
Additional reading – Capital gains tax on Property
Can one avail both exemptions?
There are no restrictions on claiming HRA and Home Loan Interest even if both houses are in the same city. However, the taxpayer must establish a sufficient reason for not staying in their own house. Sometimes, such cases are closely monitored by Income tax officials. If there are any conflicts in filing, the income tax department can disallow filing if not satisfied.
In case you reside in your own home, you cannot claim a tax deduction on HRA. However, if you have a Home loan on your house, you can claim a deduction on the Home Loan Interest and the Principal repayment to their capped limits. In such a scenario, legal documentation is a must with a sales deed, Occupancy Certificate, etc to support the claim. The ownership of the property must be in the taxpayer’s name.
Yes, it is possible to claim tax benefits together on HRA and Home Loan Interest, provided certain conditions are met. There is an inherent obligation to maintain records with respect to the taxpayer.
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