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December 27, 2022

Experts wants to extend HRA tax benefit to home loans

by CA Shivam Jaiswal in Income Tax

Experts wants to extend HRA tax benefit to home loans

House rent allowance (HRA) is the most common component in salary slips. Renters can benefit from the tax benefits offered by HRA. The Chamber of Tax Consultants (CTC) noted in its pre-Budget memo and consultations with officials of the Central Board of Direct Taxes (CBDT) that it could be preferable from an I-T perspective to stay in rented premises. Both the options (buy or rent) should be brought on a par from the tax perspective and in any case, renting should not be incentivised, tax experts say as per media report .

HRA exemption is limited to the lowest among the three components: Rent paid minus 10% of salary (here salary denotes basic salary plus dearness allowance); 50% of salary if the house is situated in the four metros or 40% of salary in other cities; actual HRA received Under section 10 (13A) of the I-T Act.

Let’s say an individual, with a monthly basic salary of Rs 15,000, receives HRA of Rs. 7,000 and pays Rs. 8,400 rent for accommodation in a metro city. The tax rate applicable to the individual is 20 per cent on his income under the old tax regime.

To avail HRA benefit, the least of the following amount (yearly) is exempted, rest is taxable:
i) Actual HRA received = Rs. 84,000 (7000 x 12)
ii) 50% of salary (metro city) = Rs. 90,000 (50% of Rs .(15,000 x 12 = 1,80,000))
iii)  Excess of rent paid annually over 10% of annual salary = Rs .82,800 (Rs .1,00,800* – (10% of Rs. 1,80,000))
*8400X12 = 100,800

It shows that of Rs 84,000 actually received as HRA, Rs .82,800 gets tax exemption and only the balance of Rs. 1,200 gets added to the employee’s income, on which a tax of Rs 240 (20 per cent slab) gets payable.

According to CTC, the benefit of the exemption offered in the case of HRA must be extended to the repayment of home loans , taken for acquisition of a first house by an employee. However, it would not be allowed to deduct the same EMI payment twice under different sections. Additionally, this plan would encourage real estate purchases and housing development as per media report .

A deduction of Rs 1.5 lakh can be claimed under section 80C for the repayment of home loan instalments taken from authorised channels (say a bank). However, this limit is inclusive of all investments and expenditures eligible for deductions under this section, such as contributions to Public Provident Fund (PPF) and Employees’ Provident Fund (EPF). Often, salaried employees exhaust the Rs 1.5-lakh cap with EPF and other investment schemes . Further, if the house is sold within five years of purchase, all home loan repayment deductions availed earlier under section 80C get reversed in the year of sale.

Tax specialists recommend reexamining a number of issues. The highest amount of home loan interest that can be deducted under the heading “income from house property” If a housing project is delayed beyond five years, the buyer is penalised as the interest deduction is limited to just Rs 30,000.If a house is self-occupied, the maximum home loan interest allowed as deduction under the head income from house property’ is Rs 2 lakh. If a house is under construction, interest is allowed in five equal instalments only after construction.

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