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Optimising Tax Benefits: Can you claim both HRA and home loan interest in your ITR

Updated: Dec 9, 2023


Optimising Tax Benefits: Claiming both HRA Exemption and Home Loan  Interest  - Taxbuddy

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.