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June 26, 2020

Can you claim both HRA and Home Loan Interest Deduction in Income Tax?

by Rubina Dsouza in Income Tax

Can you claim both HRA and Home Loan Interest Deduction in Income Tax?

What is House Rent Allowance (HRA)?

HRA is an amount which is paid by employers to employees as a part of their salaries. HRA is an exemption provided, only if the employee is living in rented accommodations. In case the employee lives in his/her own house and does not pay any rent, he/she cannot claim HRA to save on taxes.

How is HRA computed?

HRA depends on the salary of the employee. HRA shall be the least of the following:-

  1. Excess of rent paid annually over 10% of annual salary
  2. 50% of Basic salary (in case residence is in a metro city) or else 40% of Basic salary (in case residence is in a non-metro city)       
  3. Actual amount allotted by the employer as the HRA

Is any deduction available w.r.t interest on loan for purchase/construction of house property?

Homeowners can claim a deduction on their home loan interest, if the owner or his family resides in the house property under section 24 of Income Tax Act, 1961 while computing ‘Income From House Property’.

Interest deduction is restricted to Rs 2 lakhs under Section 24. However, deduction on interest is limited to Rs. 30,000 instead of Rs 2 lakhs if both the following conditions are satisfied:-

  1. The loan is taken on or after 1st April 1999
  2. Purchase or construction is not completed within 5 years from the end of the FY in which loan was taken

What are the instances where a person will require the benefit of HRA as well as interest deduction under section 24?

Provided below are some of the common instances, where a person will require the benefit of HRA as well as interest deduction under section 24?

  1. where a person may be working in a different city and paying rent there but the family stays in a different city in a house for which the person may be paying interest as well
  2. where a person owns the house smaller in size but may be staying in another house on rent which is bigger and fit for his requirement
  3. where a person may have bought the house but may not be able to shift immediately due to vicinity of the existing school of the children where he is staying on rent, etc.

The primary test is if the person is living in Rented House and has person paying rent on property. In that case a person can claim HRA irrespective he claims interest on housing loan

Can You Claim Both HRA And Home Loan For Tax Exemption?

For instance, there can be a situation where a person works in one city where he/she lives on rent, and his/her family resides in another city, where the person has bought a home where his/her family is residing.

Homeowners, who are paying back their home loan and getting HRA as part of their salary, can avail both the house property related tax benefits to lower their taxable income.

Let us understand the same with the help of an example:-

Mr A lives in Mumbai and pays a rent of Rs 15,000 p.m. He gets an HRA of Rs 18,000 p.m. His basic salary is Rs 60,000 p.m. Mr. A has taken a loan to buy a house in Delhi where his parents currently reside. The interest he pays on the loan for his house is Rs 18,000 p.m.

Computation of HRA

Mr A can claim deduction of HRA while computing his salary income. HRA deduction per month shall be least of:-

  1. Actual HRA received = Rs 18,000
  2. 50% of Basic salary since he lives in Mumbai = Rs 30,000
  3. Rent paid – 10% of Basic Salary = Rs.15,000 – Rs. 6,000 = Rs. 9,000

Therefore HRA exempt = Rs.9,000 per month. Remaining HRA of Rs 18,000 – Rs 9,000 = Rs.9,000 per month will form part of his taxable income under Salaries on account of HRA.

Computation of Income from House Property

Gross Annual Value (GAV)Nil (as the property is not let out)
(-) Deduction u/s 24 
Standard Deduction @30%Nil (as GAV is nil)
Interest (18,000 * 12) restricted to Rs 2 lakhs(2,00,000)
Income from House Property(2,00,000)

Net Loss of Rs 2 lakhs will be added to his taxable income under the head ‘Income from House Property’

As both home loan interest tax exemption and HRA fall under different sections, assessees are allowed to claim both HRA and home loan benefits. The income tax department has made provisions to ensure citizens owning a house can avail the benefit of interest deduction but if you are also staying in a rented flat then you will not miss out on tax benefits. 

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