Can I Claim Both HRA and Home Loan Interest Deduction?
Many salaried individuals take home loans while continuing to live in rented accommodations due to work location, family preferences, or personal reasons. This raises an important tax question: Can a taxpayer claim both House Rent Allowance (HRA) exemption and home loan interest deduction in the same financial year?
The answer is yes, but it depends on specific conditions. The Income Tax Act allows both HRA exemption under Section 10(13A) and home loan interest deduction under Section 24(b). However, both benefits cannot be claimed together if the taxpayer is residing in their own self-occupied home.
Table of content
Understanding HRA (House Rent Allowance) Exemption
What is HRA?
House Rent Allowance (HRA) is a component of a salaried employee’s salary structure, designed to assist with rental expenses. HRA is partially or fully exempt from tax under Section 10(13A), subject to certain conditions.
Who Can Claim HRA?
The individual must be a salaried employee and receive an HRA component as part of their salary package.
The employee must be paying rent for residential accommodation.
Self-employed individuals cannot claim HRA.
HRA Exemption Calculation Under the Old Tax Regime
The HRA exemption is calculated as the least of the following three values:
Actual HRA received from the employer.
50% of basic salary (for metro cities) or 40% of basic salary (for non-metro cities).
Actual rent paid minus 10% of basic salary.
Example Calculation:
Annual salary: ₹10,00,000
HRA received: ₹3,00,000
Rent paid per year: ₹2,50,000
Basic salary (metro city): ₹5,00,000
HRA exemption is calculated as:
Actual HRA received: ₹3,00,000
50% of basic salary (metro city): ₹2,50,000
Rent paid minus 10% of basic salary: ₹2,50,000 - ₹50,000 = ₹2,00,000
The lowest of these values is ₹2,00,000, which will be exempt from tax.
Understanding Home Loan Interest Deduction (Section 24(b))
How Does Home Loan Tax Deduction Work?
If an individual has taken a home loan, they can claim tax benefits under the following sections:
Section 24(b): Deduction on Interest Paid on Home Loan
Deduction limit: Up to ₹2 lakh per year for self-occupied property.
No limit on deduction if the property is rented out.
Section 80C: Deduction on Principal Repayment
Maximum deduction of ₹1.5 lakh per year.
Section 80EE and 80EEA:Â Additional Benefits for First-Time Buyers
Section 80EE: Additional deduction of ₹50,000 (for loans sanctioned before March 2017).
Section 80EEA: Additional deduction of ₹1.5 lakh (for property value under ₹45 lakh).
Can You Claim Both HRA and Home Loan Interest Deduction?
Yes, but only under these Conditions:
A taxpayer can claim both HRA and home loan interest deduction in the following situations:
The individual owns a house in another city but lives in a rented house due to work.
The owned house is under construction, and the employee stays in a rented house.
The taxpayer has rented out their own home while living in another rented accommodation.
When you cannot claim both?
If you live in your own self-occupied house, HRA cannot be claimed.
If your employer does not provide HRA, you cannot claim HRA exemption.
If you wrongly claim both benefits without actually living in a rented house, it may result in an income tax notice.
Old vs. New Tax Regime: Which One Offers More Benefits?
Feature | Old Regime | New Regime |
HRA Exemption (Section 10(13A)) | Available | Not Available |
Home Loan Interest Deduction (Section 24(b)) | Available | Not Available (for self-occupied homes) |
Principal Repayment Deduction (Section 80C) | Available | Not Available |
Which Tax Regime is Better?
Old Regime: More beneficial for individuals who pay high rent or have home loan interest deductions exceeding ₹2 lakh.
New Regime:Â More beneficial for individuals with minimal deductions, as it offers lower tax rates.
Case Studies: Maximizing Tax Benefits
Case 1: Employee Paying Rent While Owning a Home in Another City
Salary: ₹12,00,000
HRA Received: ₹3,60,000
Rent Paid: ₹25,000 per month
Home Loan Interest Paid: ₹2,20,000
Tax Savings:Â The employee can claim both HRA exemption and home loan interest deduction.
Case 2: Employee Living in Their Own Home and Paying EMI
Salary: ₹15,00,000
Home Loan Interest Paid: ₹1,80,000
Tax Savings:Â The employee cannot claim HRA but can claim home loan benefits.
Common Mistakes to Avoid
The following common mistakes should be avoided while claiming HRA and home loan interest deduction:
Claiming both HRA and home loan deduction incorrectly.
Not maintaining rent receipts or home loan statements as proof.
Failing to inform the employer about home loan benefits.
Conclusion
A taxpayer can claim both HRA and home loan tax benefits, but only under specific conditions. Choosing between the old and new tax regime depends on the deductions available and tax-saving potential. Proper documentation is essential to avoid scrutiny from tax authorities.
By understanding these rules, taxpayers can maximize their tax benefits and make well-informed financial decisions.
FAQs
1. Can I claim both HRA and home loan deduction in the same financial year?
Yes, but only under specific conditions. If you live in a rented house and own a home in another city or if your owned house is under construction, you can claim both.
2. Can I claim HRA if I live in my own house?
No, HRA is only available if you pay rent. If you live in your self-owned home, you cannot claim HRA.
3. Is home loan interest deduction available in the new tax regime?
No, home loan interest deduction under Section 24(b) is not available for self-occupied property in the new tax regime.
4. Can I claim HRA for a house I own and live in?
No, you cannot pay rent to yourself and claim HRA.
5. What if I own a house but stay in a rented home in the same city?
You can claim both HRA and home loan interest deduction if you can justify that the owned house is not suitable for residence due to work location or other valid reasons.
6. Can a self-employed person claim both benefits?
No, self-employed individuals cannot claim HRA but can claim home loan interest deduction under Section 24(b).
7. What if my home loan property is rented out?
If your owned house is rented, you can claim unlimited home loan interest deduction under Section 24(b) and also claim HRA if you stay in a rented house.
8. Can I claim HRA if I pay rent to my parents?
Yes, but you must ensure a legal rent agreement exists, and your parents must declare the rent as income.
9. Do I need to submit proof for both HRA and home loan deductions?
Yes, rent receipts are required for HRA, and home loan EMI statements are required for interest deductions.
10. What if I have a joint home loan?
Each co-owner can claim ₹2 lakh home loan interest deduction separately if they contribute to the EMI payments.
11. Can I switch between old and new tax regimes every year?
Yes, salaried employees can choose between the old and new tax regimes every year when filing returns.
12. Does claiming both benefits increase my chances of an income tax notice?
No, as long as you meet the eligibility criteria and provide valid documentation, there is no issue in claiming both benefits.
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