Can we claim tax exemption for both HRA and Home loan interest?

Can we claim tax exemption for both HRA and Home loan interestCan we claim tax exemption for both HRA and Home loan interest?

For some time I have been planning to take a home loan to buy a new house. One thing came to my mind is after I take home loan I would be eligible to claim tax exemption on home loan interest. However, what happens to HRA? Can I still claim tax exemption on HRA? Is the scenario would be different if I buy a second house with housing loan. Am I eligible to get tax exemption for housing loan interest taken in my second home? I have analyzed in detail and I thought I should share it with you which would be useful for you.

In India, as per the present scenario, the rich are becoming richer and the poor are becoming poorer. Ideally, the class of people who is on the safe side is the salaried class of employees. Once we get a good job, it is very probable that we don’t have to look back until there is some kind of unexpected happening or if we don’t perform our job well.

Now one of the important components of a salary package is HRA i.e. house rent allowance. HRA is an allowance paid by an employer to an employee to help him meet his cost of renting an accommodation.

Also Read: Best Home loan Interest rates in India

How HRA is computed?

The House Rent Allowance so paid by the employer to his employees is taxable under the head “Income from Salaries” to the extent it is not exempt u/s 10 (13A). In order to claim this particular section, an employee must

  • Receive HRA,
  • Pay actual rent for his accommodation
  • Should not be the owner of the said accommodation, i.e. he should not pay rent for himself!

The amount of allowance is the lowest of the following three limits:

  • Rent paid less 10 per cent of salary.
  • An amount equal to 50% of the Salary (where the residential house is situated in Mumbai, Kolkata, Delhi, Chennai) (or) 40% of the salary where the residential house is situated in any other place.
  • The actual amount of allowances received in the relevant period during which the rental accommodation was occupied by the employee during the previous year.

What is home loan and how the home loan interest would be treated from a taxation perspective?

If a person takes a loan for the acquisition or construction of a house property then he can claim tax benefits. Housing loan consists of two components one being interest portion and other is the principal amount. The interest paid towards home loan is treated as an ‘expense’ under the head ‘Income from house property’ and can be claimed u/s 24 (b) irrespective of the house being self occupied or let-out.

If the house is self occupied, the maximum limit under this section is Rs. 1, 50,000 and the assessee does not have to actually reside in the property to claim this exemption.

If the house is let-out, there is no such maximum limit of deduction which can be claimed. This will then be taxed under income from house property.

Let me explain this with an example:

My friend Priti is working and residing in a rented apartment in Ahmedabad. She also bought a house in Kolkata under the housing loan scheme, where her parents stay. Now the question arises whether she can claim an exemption for both HRA as well as house loan interest? The answer is yes, she can. House Rent Allowance (HRA) is explained u/s 10 (13A) of the Income Tax Act while Interest on borrowed capital for acquisition or construction of house property is explained u/s 24 (b) of the Income Tax Act. The deduction for payment of principal component of such home loan is granted under section 80C of Deduction under Chapter VI of the Income Tax Act.

Coming back to the example, Priti has 2 options with her newly purchased home.

1) If it is self-occupied, she would be entitled for the maximum tax deduction on interest paid allowed under Section 24 subject to a maximum limit of Rs 150,000. Even if the house would have been vacant, Priti was still eligible for this deduction.

2) If the property is not self-occupied and is let-out the total interest paid during that financial year can be claimed under Section 24B and this will be set-off against Priti’s income from house property (annual rental value would be considered for this) and income from salary.

The annual rental value will be the higher value of the following

  • Actual rent received in a year
  • Municipal value and
  • Fair rent fixed by the Income Tax Department.

How to claim tax exemption from both HRA and Home loan interest?

The above sections (Sec 10 (13A) and Sec 24) are all together different and has no interlink with each other. One can claim both HRA and interest on home loan irrespective of the place of stay and office but has to satisfy the necessary conditions to claim such deduction or exemption.

Also read: Should you prefer pre-approved home loan option?

Home loan interest for the first house as well as the second house explained with an illustration

Let us consider one more example to understand this. Mr. Manish is availing of tax benefit on home loan and have recently purchased a second home. The EMI for the second loan is more than that for the first one. Now what happens?? The answer is, Manish can avail of tax benefits on the second house by claiming it as self-occupied. If you own two houses, you can claim only one as self-occupied, while the other will be considered as let-out property. The notional rent on the second house will be added to your income and will be taxed as per the applicable tax slab. However, you will be allowed to deduct the interest on the home loan from the notional rent. If you want to save tax, invest in your spouse's name if she owns no other residential property. You will also have to pay wealth tax on the second house as only one residential property is exempt from it. To avoid this, it is better to invest in a commercial property.

Conclusion remarks: Thus we conclude that Income tax laws of India, especially in HRA give us a lot of scope to claim benefits and exemptions if we want to. But we should know the right way and head in the right direction to claim the maximum benefit! So, take good properties if your pocket allows and use these IT laws to the fullest!!

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Suresh
We claim tax exemption for both HRA and Home loan interest

Suresh KP

18 comments

  1. Hi,
    I am a Government servant and purchased a property availing Home loan. I am staying in the same house and receiving HRA. I am claiming interest benefit for the home loan. I would like to know whether total amount of HRA is taxable or any deductions cane be claimed towards annual maintenance incurred and Municipal Taxes paid towards the property?

    Tks and Rgds

    Srinivas

  2. Hi Suresh

    I am paying 2 houses rent in 2 different locations. For example.. my family (spouse- h/w, children) leaving at Jaipur on rent (8000 PM) and myself staying at Gurgaon (8000) due to job. Can i claim both rent HRA ? but its corss the limit of 1 Lakh so PAN detail of landloard is mandatory ? becoz my both landloard has denied to provide the same becoz they are not getting rent more than 1 Laks in a year so what is the way out ?

    Secondly i am also trying to under construction home at Jaipur then also cam claim both HRA and principle of home loan amount deductions?

    Thanks & Regards

  3. Hi Suresh,
    I am having two home loans and both are rented out and i am staying on Rent, Am i eligible for Home loans exemption & HRA exemption? Please advise
    Thanks,
    Pavan

  4. Hi suresh,

    i have 2 home loans…

    i got the possesion of first home in dec13 and second home is under construction.

    can i avail the interest benefit under section24 of first loan(partly with my wife) and principal payment of second loan as my wife took the principal benefit of first home loan in section 80c.

  5. Who tax consultant se yeh sab poochte hein

     

    1.       I stay in a flat in Mulund which is in my father’s name. Now I am planning to buy a property jointly with my wife in thane or Mulund. We both plan to take a joint loan. I don’t intend to stay in the new flat and it’s for investment purpose. Will put the same on Rent.

    a.       Does the home I purchase, qualifies as Second Home.

    b.      Is there a restriction of Jurisdiction to qualify it as 2nd Home? Like is it necessary that both the houses shouldn’t be in the same city.

    If yes it qualifies for the 2nd home, then

    2.       My Loan amount would be approx.  80 lacs

    So will the below is legally advisable to save tax

    a.       Claiming HRA exemption on 1st flat (which is in fathers name)

    b.      Claiming total interest component as tax exempt (say 6lacs).

    Also I suppose the income arising from rent of the 2nd home is taxable, i.e. 70% of Total rent (assuming 30% can be shown as Municipal taxes, repair and society maintenance). Can it be net off against the Interest paid on home loan? Also if it’s negative then can it be deducted from the taxable income?

    Rent received annually

    1.5 lacs

    Minus Municipal tax, repair and maintenance

    0.45 lacs

    Net Rent Income Taxable

    1.05 lacs

    Minus Loan Interest Component

    6 lacs

     Net Income Taxable

    – 4.95 lacs

    e.g

     

     

     

     

     

     

     

     

     

     

     

    c.       Can both (me and my wife) of us claim exemption on the 4.95lacs?? IF no, then it has to 50-50 or in the ratio of EMI paid?

    d.       Also does the slab of 1.5lacs pa for loan principal amount exemption apply for 2nd home as well?

    e.      Can any amount that is left over may be carried forward in the tax return as loss from property to the next year? As years go by and the loan gets paid off, the interest component that is getting set-off against the rental income each year will keep on reducing. On the other hand, typically, the rent would tend to increase each year or at least once every 2-3 years. This will go on to lead to a positive differential between the rent received and the interest paid and this difference would be taxable. At this point, I Suppose the carried forward interest will be useful to reduce tax liability. (it is mandatory to file the tax return by July 31 (for individual taxpayers))

    f.        Even if the 2nd Home is not on rent and kept unoccupied do I need to pay tax on Notional Rent?

    g.       Additionally, if you give your second house on rent for more than 300 days in a year, it will not be subject to wealth tax, which is levied at the rate of 1% on wealth that is in excess of Rs 30 lakh?

  6. Dear Suresh

     

    I have two home loans for which I am paying the EMI. For one, I am the owner and for second, it is jointly owned by me and my husband. Now I have two questions:

    1) Can I and my husband still claim HRA?

    2) Can I claim tax exemption on interest on both of my loans?

    Thanks in anticipation

    Vaishali Gupta

     

    1. Vaishali, This is possible only when it is let outย and you are showing rental income, then you can claim interest too. You may have multiple houses and home loan interest can be claimed for any number of houses.ย 

  7. Hi Suresh,

    1. How many house loans can we take (and get tax benefit for), Is there any limitation?

    2. Currently I have house loan (I am working in Hyderabad and house was taken at another location). I am planning to close the current loan and want to take another loan to buy a new house. Since I am closing the first one, would I avail complete tax benefits for second loan (24/24b and 80c)

    Thanks,

    Suresh B

    1. Suresh 1) You can take any number of home loans, there is no limit, banks should be willing to give you ๐Ÿ™‚ 2) Yes, provided you declare this as self occupied property.

  8. Hi,

    I have purchased under construction house in Feb 2013 on and it's possession would be in Nov, 2014. It will be self occupied property after possession. My questions regarding income tax benefits are-

    1) Can i claim tax exemption for HRA under section 13A (From Apr 14 to Nov 14) and also for interest part of home loan paid after possession (from Nov 14 to Mar 15) under section 24b?

    2) OR M I eligible only to claim either of HRA or homeloan interest for 2013 -2014? In that case can i claim only interest or HRA (whichever is beneficial for me) for whole year 2013-2014 irrespective of the fact that i will take my home possession only in Nov 2014 and would be on rent from Apr14 to Oct14?

     

    Please advice how to deal with this HRA and interest part of home loan in my case.

    Your advice much appreciated.

     

    Thanks in advance.

  9. Hi,

      I have first house for which i have closed the housing loan. If i plan to buy second house , will the interest part eligible claim of unlimited interest (if i let out this or if i let out first property)

     

    Thanks

    DInesh Shetty

     

    1. Dinesh, As per my knowledge you can indicate that first house is self occupied and second house is letout and you can claim unlimited interest, but you need to declare rental incme as per income tax law and claim balance as exemption.

  10. Great article Suresh. Thanks for bringing this up.

    Can we claim tax exemption on property which is still under construction since my understanding was till the time possession does not happen one cannot. Is this true since i have a property which is under construction & i am paying a huge EMI but the property would be constructed only by Dec 2014. I have not been claiming any dedection till date since i am waiting for possesion letter.

    Please advise sir.

    Thanks

    Vikram

     

    1. Vikram, You cannot claim interest exemtion for under construction property.ย The interest for the pre-construction period can be availed for deduction in five equal installments from the year the construction is complete

  11. Hi Suresh,

    Recently i have purchased a flat, my EMI will start from this month. I will be getting the position of the flat only from May 1st 2014. Till then i will be staying in the rented house. Will i be able to claim both HRA and Home Loan exception for tax.

    Regards

    sataveerappa

     

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