Many people in India have purchased homes using loans and are paying installments. The Income Tax authorities provide various tax benefits for such individuals by allowing interest expenses on the loan as a deduction under “Income from House Property” and the principal repayment as a deduction under Section 80C. Additionally, salaried individuals often receive House Rent Allowance (HRA), which is primarily meant to cover rent expenses.
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A common question that arises is: Can I claim both HRA and home loan deductions together? Let’s discuss this in detail.
What is House Rent Allowance (HRA)?
House Rent Allowance (HRA) is an allowance employers provide as part of the salary components. This allowance is primarily intended to help employees meet their rent expenses. The Income Tax authorities offer relief to individuals receiving HRA by allowing exemptions from the HRA component based on the rent paid, subject to certain conditions. The amount of HRA exemption is lower of:
- HRA Received
- Actual Rent paid minus 10% of Salary (Basic + DA)
- 40% of Basic Salary (Basic + DA) [50% for those living in metro cities (Delhi, Kolkata, Mumbai, or Chennai]
Clarifications by Income Tax Act:
- If you own the home you live in: You can’t apply for any tax benefits that are typically available for people who pay rent.
- If you don’t pay rent for the place you live in: You can’t claim any tax deductions that are meant for rent expenses, even if you receive a housing allowance.
What are home loan deductions?
Home loan deductions refer collectively to the deduction of interest expenses under Income from House Property and the deduction of principal repayment under Section 80C. Let’s learn how these deductions work.
Interest Expenses Deduction
You can claim a deduction for interest paid on a home loan up to ₹2 lakh per annum. If the loan is for construction or purchase, the construction must be completed within 5 years from the end of the financial year in which the loan was taken. If not, the deduction is limited to ₹30,000.
For e.g., If the loan was taken on 30th April 2019, the construction of the property should be completed by 31st March 2025 if you want to claim the deduction up to ₹2 lakh.
Principal Repayment Deduction
You can claim a deduction of up to ₹1.5 lakh per annum under Section 80C for the repayment of the principal amount of a home loan, regardless of whether the house property is self-occupied, let-out, or deemed let-out. This deduction is one of the many options available under Section 80C to save taxes, alongside others such as life insurance premiums, PPF contributions, ELSS investments, etc.
Now, the golden question is: Can we claim both these deductions together?
The Income Tax Act does not specifically address the legality of claiming both HRA and home loan deductions. Therefore, we need to review the rules governing each deduction to determine whether both can be claimed together.
By combining the rules under both heads of income, you can claim both HRA and home loan deductions in a case where:
- The individual is living in a rented place in the city of employment.
- The individual is receiving the HRA component in their salary.
- The individual has availed a home loan and purchased a house in their name or jointly with their spouse.
This typically applies in cases where you live in one city for work while owning a house in another city for your family.
Case study:
Background: Rahul, a software engineer based in Bangalore, owns a house in Pune and rents an apartment in Bangalore.
Scenario: Rahul wants to maximize his tax savings by claiming both House Rent Allowance (HRA) for the rent he pays in Bangalore and home loan interest deductions for his property in Pune.
Financial Details:
- Location of Rental: Bangalore
- Monthly Rent: ₹15,000
- Annual HRA Received: ₹1,44,000
- Location of Owned Property: Pune
- Annual Interest on Home Loan: ₹3,60,000
Tax Implications:
HRA Benefits:
- Eligible HRA Exemption: ₹1,44,000 (calculated based on salary and rent paid).
Home Loan Deductions:
- Interest Deduction under Section 24(b): Up to ₹2 lakh.
- Principal Repayment under Section 80C: Up to ₹1.5 lakh.
Conclusion:
Rahul can legally claim both HRA and home loan interest deductions, as they pertain to different properties in different cities. This dual benefit arises from his employment necessitating residence in a different city than where his owned home is located.
Key Takeaway: Such tax planning is advantageous for professionals who maintain residences in multiple cities due to work requirements, allowing them to utilise both deductions effectively.
Conclusion:
Yes, you can avail yourself of both HRA benefits and home loan deductions, such as interest and principal deductions, provided that all the rules specified under the Income Tax Act are followed.
Understanding and following these rules can sometimes be overwhelming, and getting your taxes planned by qualified advisors can be very helpful. A qualified financial advisor can assist you in optimal tax planning and filing your taxes. To optimise your tax planning, download the 1 Finance app and book a consultation with a qualified financial advisor for a seamless, hassle-free experience.
