All that you wanted to know about HRA

Ajit, currently working for Company A, stays in a rented apartment in Mumbai and has bought himself a property in Chennai. He took a loan for buying the house.

He finds himself in a dilemma while filing tax returns: "Can I claim both HRA and home loan benefits?" This seems to confuse most tax payers.

When Ajit pays rent, under the Income Tax Act, he is definitely allowed to claim both HRA and home loan benefits (interest payment and principal repayment).

Let us evaluate possible situations and what the Income Tax Act permits.

You live in your own house

You have taken a home loan to buy a property and stay in the same house. You will not be able to claim HRA in this case. However, you will be able to claim tax benefits on the principal as well as the interest paid on the home loan.

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You own a house in another city

This situation was the one Ajit faced. He resides in Mumbai but bought an apartment in Chennai taking a home loan. Ajit will be entitled to HRA exemption and tax benefits on both - the principal and interest repaid on the home loan.

Your house cannot be occupied at this point (example, under construction)

You have bought a house, say in Mumbai taking a home loan and you're currently living in the same city on rent because the house is under construction. In such a case, you are eligible to claim HRA.

In the case of tax breaks on the home loan, you can claim tax benefits only for your principal before the completion of your house.

Once your house is completed, you can claim tax benefits on the total interest paid up to the date of completion in five equal installments in five years beginning from the year of completion.

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You have a house which is ready for occupation but you cannot reside in it

You have bought a house, say in Delhi taking a home loan and now you aren't residing in. Rather you are on a rent in the same city for genuine reasons, for example, the house that you bought is far from your office.

In such cases, the Income Tax Act permits the person to claim HRA and home loan benefits which includes both principal and interest repaid.

Also, ...

The Income Tax Act treats HRA and home loan deductions under separate sections independently; the two are not interconnected.

HRA is dealt in section 10(13A) Rule 2A, while home loans are entitled for tax benefits under section 80C (tax benefit on principal repayment) and Section 24 (tax benefit on interest payment) of the Income Tax Act. Hence, feel free to avail both tax benefits accordingly.

Now, that we have dealt with all possible situations regarding HRA and home loan tax benefits, let's take Ajit's situation as an example to help you figure out how to avail them.

Claiming tax benefits on a home loan

Ajit has purchased an apartment in Chennai for Rs 38 lakh (Rs 3.8 million) three years back. He took a home loan of Rs 32 lakh (Rs 3.2 million) to fund this purchase.

So far, this year he has repaid an interest of Rs 330,000 and a principal amount of Rs 60,000.

Section 80C offers tax rebate on home loans up to a limit of Rs 100,000 and Section 24 on interest up to a limit of Rs 150,000. So, Ajit can utilise up to Rs 150,000 on his interest paid and avail the tax benefits in full for the amount paid towards principal.

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Calculating tax benefits on HRA

Ajit earns a basic salary of Rs 40,000 per month and has rented an apartment in Mumbai for Rs 20,000 per month (he is eligible for 50 per cent of the basic pay for HRA exemption, as he resides in a metro). The actual HRA he receives is Rs 25,000.

These values are considered to find out his HRA tax exemption:

• Actual HRA allowance from the employer, that is, Rs 25,000
• 50 per cent of the basic salary as he resides in a metro (else 40 per cent), which is Rs 20,000, and
• The actual rent he pays for the house from which 10 per cent of his basic pay is deducted, that is, Rs 20,000 - Rs 4,000 = Rs 16,000

The value considered for his actual HRA exemption will be the least value of the above figures. Hence, the taxable HRA amount for Ajit per month will be Rs 25,000 - 16,000 (available HRA deduction) = Rs 9,000.