Optimising Tax Benefits: Can you claim both HRA and home loan interest in your ITR
Updated: Dec 9, 2023
There is a common misconception among salaried individuals that they have to sacrifice the House Rent Allowance (HRA) exemption from their employer to avail the deduction on the interest paid on their home loan. However, it's crucial to clarify that there is no need to forego the benefits of HRA in order to claim the deduction on home loan interest. As per the provisions outlined in the Income Tax Act of 1961, individuals can avail themselves of both HRA exemption and interest deduction on a home loan, provided they meet the specified requirements. This article aims to provide a comprehensive explanation of various scenarios and the permissible amounts that can be claimed for both HRA exemption and home loan interest deduction under the provisions of the Act.
Table Of Contents
House Rent Allowance (HRA) from a broad perspective
House Rent Allowance (HRA) is typically claimed by salaried individuals living in rented accommodations. The HRA is a component of the salary provided by employers to employees to cover their rental expenses.
What is HRA
House Rent Allowance (HRA) is an allowance provided by employers to employees as a part of their salary structure. It is specifically meant to cover the expenses related to renting residential accommodation. HRA is a common component in the salary packages of employees, particularly in urban areas where individuals often live in rented homes.
Conditions to claim HRA Exemption
Conditions are outlined in the Income Tax Act, and they include:
The individual must be a salaried employee
The individual must be living in a rented house and paying rent to a landlord.
The employer must provide HRA as part of the employee's salary package.
The employee needs to submit proof of rent payment to the employer, such as rent receipts or a rental agreement.
Certain Cases where HRA Exemption is not allowed
HRA cannot be claimed if the individual owns the property in the city of employment.
If HRA is not a component of the salary, or if the individual is not living in rented accommodation, the exemption cannot be claimed.
Taxability of Salary
Income from salary is taxable, but salaried individuals can claim House Rent Allowance (HRA) exemption under the old tax regime. However, under the new tax regime, no specific exemption is available for HRA. The HRA exemption helps reduce the taxable portion of salary, as it is determined based on factors such as actual HRA received, salary structure, and rent paid. It's important to note that the amount of exemption is restricted to the extent given below. By utilising the HRA exemption, individuals can lower their taxable income, ultimately reducing their overall tax liability.
The amount of House Rent Allowance (HRA) that can be claimed as an exemption from taxable income is determined based on the Lower of the following:
1. Actual HRA Received: This is the actual amount of HRA received by the employee from their employer.
2. 50% (or 40%) of Basic Salary: If the individual is living in a metro city, 50% of the basic salary is considered for the calculation. For nonmetro cities, the percentage is 40%.
3. Rent Paid Minus 10% of Basic Salary: The excess of rent paid over 10% of the basic salary is taken into account.
Important Note: If the annual rent paid by the employee exceeds INR 1,00,000, it is mandatory to declare the landlord's PAN to the employer. If the PAN is unavailable, the landlord must provide a declaration with their name and address, which the employee should submit to their employer.
If the landlord is a non-resident Indian (NRI), a tax deduction at source of 31.2% (comprising a base rate of 30% and a cess of 4%) is applicable before making the rent payment.
In the case of Non- Resident Landlord
TAN (Tax Deduction and Collection Account Number) is essential for deducting TDS on rent payments. Obtain it online through the NSDL website. Pay TDS to the NRI landlord's NRO (Non-Resident Ordinary) account, designed for managing Indian income. Even if rent is paid in instalments, TDS is calculated on the total amount. Issue a TDS certificate (Form 16A) to the NRI landlord within 15 days of each quarter's end for tax return filing.
It's essential for individuals paying rent to comply with TDS regulations and fulfil their obligations. Failure to deduct TDS when required can lead to penalties and legal consequences. However, it doesn't directly affect HRA exemption.
Tax Benefits associated with a Home loan
Tax benefits on home loans are provided under the Income Tax Act in India. These benefits can significantly reduce the financial burden on individuals who have taken home loans. Here are the key tax benefits associated with a home loan:
Home Loan Interest Deduction (Section 24(b)):
Individuals can claim a deduction on the interest paid on a home loan under Section 24(b) of the Income Tax Act. For a self-occupied property, the maximum deduction allowed is ₹2 lakh per annum.
If the property is let out (rented), there is no maximum limit on the interest deduction.
Principal Repayment Deduction (Section 80C):
Principal repayment of the home loan is eligible for a deduction under Section 80C of the Income Tax Act. The maximum limit for this deduction, including other eligible investments, is ₹1.5 lakh per annum.
First-Time Homebuyers (Section 80EEA):
First-time homebuyers can avail an additional deduction on the interest paid on a home loan under Section 80EEA. This deduction is up to ₹1.5 lakh and is over and above the limit available under Section 24(b).
Affordable Housing (Section 80EEA):
There's an additional deduction available for interest on home loans for affordable housing under Section 80EEA.This deduction is available to both first-time and non-first-time homebuyers, with certain conditions.
Joint Home Loan Benefits:
If a home loan is taken jointly with family members, all co-borrowers can individually claim deductions on both interest and principal repayment, subject to specified limits.
Pre-Construction Interest (Section 24(b)):
For home loans taken for the purchase or construction of a property, interest paid during the pre-construction period can be claimed in five equal instalments, starting from the year of completion of construction.
Scenarios where taxpayers can claim both HRA and home loan interest in your ITR
Certainly, claiming both House Rent Allowance (HRA) exemption and interest on a home loan is permissible under the Income Tax Act, as these provisions are independent of each other. Here are possible scenarios where an employee can claim the benefit of both:
1. Living in a Rented House while Servicing a Home Loan:
An individual can reside in a rented house, allowing them to claim HRA exemption. At the same time, they may have secured a home loan for a self-occupied property, qualifying them for the deduction on home loan interest. Individuals may choose to live in a rented house due to job location, investment strategies, or personal preferences while simultaneously owning a property through a home loan for various reasons such as potential investment opportunities, temporary living arrangements, or financial flexibility.
2. Joint Ownership of a Property and Renting a House:
Individuals co-owning a property with someone else can jointly claim the deduction on home loan interest for their share. If one of the co-owners is living in a rented house, they can also claim an HRA exemption.
3. Let-Out Property and Living in a Rented House:
If an individual owns a property that is let out (rented out), they can claim the entire interest on the home loan as a deduction. Simultaneously, if the individual lives in a rented house, they can claim HRA exemption.
4. Multiple Properties Owned:
In cases where an individual owns more than one property and one is self-occupied while the others are let out, they can claim HRA for the rented accommodation and interest deductions for the let-out properties.
5. Non-Salaried Individuals:
Self-employed individuals or those not receiving HRA as part of their income can still claim the deduction on home loan interest if they meet the specified conditions.
How to Claim HRA When Not Mentioned in Form-16
If your Form-16 does not show an HRA exemption, you can still claim the HRA exemption while filing your Income Tax Return (ITR). Here's how you can do it:
Collect Rent Receipts: Ensure that you have rent receipts for the rent you paid during the financial year. These receipts should contain details such as your landlord's name, address, the amount of rent paid, and the period for which it was paid.
Rental Agreement: If you have a rental agreement, keep a copy of it as additional proof of your rental arrangement.
Calculate HRA Exemption: As given above
Declare HRA in ITR Form: While filing your ITR , declare the HRA exemption under the 'Income Details' section. You need to provide details of your salary, HRA received, and the exempt portion of HRA.
Maintain a record of all the documents submitted in case of any future verification by tax authorities.
How to Claim HRA When Living with Parents
Employees can claim HRA when paying rent to their parents, provided they adhere to certain conditions. It is advisable to have a formal rental agreement detailing the rent amount, duration, and the parent's names and addresses. Rent receipts, with pertinent details and signatures, should be obtained, and transactions should ideally be traceable through bank transfers. The HRA exemption is calculated based on actual HRA received, salary percentages (50% for metro cities, 40% for non-metro cities), and actual rent paid minus 10% of salary. When filing Income Tax Returns, employees must declare HRA exemptions and provide comprehensive details. While not strictly required, having proof of the familial relationship can be beneficial. Compliance with tax laws is crucial, and seeking advice from a tax professional is recommended for specific concerns. Ultimately, transparency and adherence to legal regulations ensure a smooth process for claiming HRA from parents.
Relief to individuals who do not receive (HRA)
Section 80GG of the Income Tax Act is a provision that provides relief to individuals who do not receive House Rent Allowance (HRA) but still incur rental expenses. This section allows taxpayers to claim a deduction for the rent paid, subject to certain conditions. It's a valuable option for those who are self-employed or not in receipt of HRA, offering financial support through tax benefits for rented accommodation expenses.
To claim the benefit under Section 80GG of the Income Tax Act, follow these steps:
Eligibility Criteria: This includes being a self-employed individual or salaried employee not receiving HRA.
Rent Payment: Make sure you are paying rent for your accommodation. The deduction is specifically for individuals incurring rental expenses.
No Self-Occupied Property: You cannot claim this benefit if you own a residential property in the city where you work or carry on your business, whether in your name or your spouse's or minor child's name.
Complete Form 10BA: If you meet the conditions, fill out Form 10BA. This form includes details such as your name, PAN, and the amount of rent paid.
Maintain Rent Receipts: Maintain rent receipts as evidence of your rental payments. These should include details like the landlord's name, rental period, and the amount paid.
Claim in Income Tax Return (ITR): While filing your Income Tax Return (ITR), claim the deduction under Section 80GG. Enter the details from Form 10BA and provide information on your rent payments.
Calculate the amount as a Deduction: The deduction under Section 80GG is the Lower of the following:
a. Rent paid minus 10% of total income.
b. 25% of total income.
c. Rs. 5,000 per month.
Pro Tip: Keep the documents, including rent receipts and Form 10BA, ready for submission if required by tax authorities.
Conclusion
Understanding these provisions becomes essential for maximising benefits and minimising liabilities. By dispelling misconceptions and providing comprehensive insights, this blog aims to empower individuals to make informed financial decisions and optimise their tax planning strategies.
FAQ
Q1. Can I claim HRA if I stay with my parents and pay them rent?
Yes, you can claim HRA when paying rent to your parents, provided you meet certain conditions and have the necessary documentation.
Q2. What happens if my landlord doesn't have a PAN card and I'm claiming HRA exemption?
If your annual rent exceeds Rs. 1,00,000, you need your landlord's PAN. If your landlord doesn't have one, obtain a declaration with their name, address, and relationship details.
Q3. How is the HRA exemption calculated when I have changed jobs during the financial year?
When changing jobs during the financial year, calculate HRA exemption separately for each job by considering the actual HRA received, salary percentage (50% for metro cities or 40% for non-metro cities), and actual rent paid minus 10% of salary. Adjust for any overlapping months, submit accurate details to your current employer, and declare the figures in your Income Tax Return (ITR). Keep proper documentation for verification purposes. Consult with a tax professional if needed.
Q4. Can I claim HRA if I own a house but live in a different city for work?
Yes, you can claim HRA even if you own a house, but you must meet specific conditions and provide relevant details while filing your tax return.
Q5. I paid rent in cash, and my landlord doesn't provide rent receipts. Can I still claim HRA?
While cash payments are accepted, it's crucial to have rent receipts as proof. Consider asking your landlord for receipts or explore alternative means of payment.
Q6. Is there a maximum limit for HRA exemption?
The HRA exemption is the minimum of actual HRA received, 50% (or 40%) of salary, and actual rent paid minus 10% of salary.
Q7. Can I claim both HRA exemption and home loan interest deduction simultaneously?
Yes, you can claim both HRA exemption and home loan interest deduction if you meet the eligibility criteria for each.
Q8. What if my employer doesn't include HRA details in my Form-16?
You can still claim HRA by providing rent receipts, a rent agreement, and other necessary documents while filing your Income Tax Return.
Q9. How do I calculate the taxable value of the perquisite for company-provided accommodation?
The taxable value of the perquisite for company-provided accommodation is calculated based on specific rules and criteria. Consult your company's HR or a tax professional for accurate calculations.
Q10. Can I claim HRA if I live in my own house but pay rent to my parents for another property?
No, you cannot claim HRA for living in your own house. HRA is specifically for rented accommodations, and claiming it in such cases may lead to legal consequences.
