Can we claim HRA and home loan together for Tax Benefit?

Can we claim HRA and home loan simultaneously for Tax Benefit? – A question which is often asked by many tax payers. This is mainly because many employers do not allow both tax benefits together in certain situations. Unfortunately this is NOT the right thing to do.

Both HRA and Home Loan Interest tax sections are unrelated. You claim tax benefit on HRA (House Rent Allowance) under section 10(13A) while the tax benefit on payment of interest on home loan comes under section 24(b). However there can be issues if both the sections are used together with the intent of tax evasion.

Tax Benefit on HRA

HRA is part of your salary structure and is paid mainly to provide for accommodation in the place of employment. A salaried person can claim HRA if both these conditions are satisfied:

1. HRA allowance is part of the Salary
2. The employee is staying in a rented accommodation and paying rent for it

How much Tax Benefit on HRA?

The maximum HRA that can be claimed for tax exemption is minimum of

1. Actual HRA Received or
2. 40% (50% for metros) of Basic + Dearness Allowance or
3. Rent paid (-) 10% of (Basic + Dearness Allowance)

The HRA calculation has been explained by an example:

Assumptions

• HRA per month = Rs 15,000
• Basic monthly salary = Rs 30,000
• Dearness Allowance = Nil
• Monthly rent = Rs 12,000
• Rental accommodation is in Mumbai (which is metro)

HRA Exemption Calculation:

• Actual amount of HRA = Rs 15,000
• 50% of salary = 50% x (30,000 + 0) = Rs 15,000
• Actual rent paid – 10% of salary = Rs 12,000 – [10% of (30,000 + 0)] = 12,000 – 3,000 = Rs 9,000

Rs 9,000 being the least of the three amounts will be the exemption from HRA. The balance HRA of Rs 6,000 (15,000-Rs 9,000) is taxable.

Tax Benefit on Home Loan

There are 2 types of tax benefits you can claim on home loan:

• Tax benefit on Principal Repayment (Section 80C): Deduction up to Rs 1.5 Lakh is allowed on the principal repayment of the housing loan if the house is self occupied or vacant
• Tax benefit on Interest payment (Section 24): You can claim up to Rs 2 Lakh deduction on the interest paid for home loan.
• Tax benefit on Interest payment of Affordable Home (Section 80EEA): Budget 2019 had introduced additional tax deduction or Rs 1.5 Lakh for payment of interest on loan taken for purchase of affordable home

Total deduction on interest on housing loan would be Rs 3.5 lakh (2 lakh u/s 24 & 1.5 lakh u/s 80EEA) for affordable house.

An important condition for claiming any home loan benefit is that your house should be ready to move. In case the house is still under construction, You can divide the home loan interest paid in under-construction period in 5 equal parts and claim it each year from the year house is ready.

Can we claim HRA and home loan together? – 4 Situations

We can now discuss situations when we would like to take tax advantage on HRA and Home Loan together. We can have following four situations:

1. Rented house in place of employment and own house in different city
2. Own house in city of employment and stay on rented house in same city
3. Own house in city of employment and stay with parents/siblings in the same city and pay them rent
4. Rented house in different city and own house at place of employment

We cover each situation one by one.

Rented house in place of employment and own house in different city

This is a very easy situation to handle. You can easily claim tax benefit on both and NO employer has issue with this arrangement.

Own house in city of employment and stay on rented house in same city

This is tricky situation. The first logical question which comes to mind is why would any person owning house in the same city stay on rent? Most employers have issue with this arrangement and may not give tax benefit on both HRA & Home Loan.

But legally you can claim tax benefit on both if you can give a valid reason for this arrangement. The reasons can be its more convenient to stay. For e.g. your flat is on the outskirts with almost negligible public transport, you might not want to live there and rather stay close to your place of employment. The other reason could be the owned house is smaller for the size of family. There are misconceptions that there should be minimum distance between two houses. All this is myth! All you need a genuine reason to stay on rent.

Also if you move to your new owned house in the middle of financial year, it’s a genuine thing to do and you can claim HRA for the period you stayed on rent and house loan benefit for the entire year. In case your employer is not ready to give tax benefit on both – you can claim HRA tax benefit from employer and claim tax benefit on Home Loan while filing your Income Tax return. 

The other question is should the owned house be assumed to have notional rent? The answer is No. If you receive actual rent then show, only then you need to pay tax on that.

Own House is under-construction

There could be situation that you are paying home loan on under construction house and staying in rented house. In this case you can easily claim HRA. However for interest on home loan to be eligible for tax benefit, your house should be ready. Hence for under construction house you cannot claim tax benefit on home loan right now. You can divide the home loan interest paid in under-construction period in 5 equal parts and claim it each year from the year house is ready.

Own house in city of employment and stay with parents/siblings in the same city and pay them rent

The situation is similar as discussed above with the difference being your landlord or landlady is your close relative like parents/siblings. Any such rental transaction is full with suspicion and so you should be very careful if you use this for tax saving. You must do the following:

1. Actually pay the rent through Cheque/ECS etc. and receiver should give rent receipt for the same.
2. The landlord/lady should show this rent as “income from house property” and pay taxes on the same.

There have been cases where rent paid to close relatives have been denied tax benefit by income tax department as there was NO evidence of actual transaction. So stay careful.

Rented house in different city and own house at place of employment

There may be case where you have rented a place where your spouse/parents stay (in a different city) while you own a house at the city of your employment and stay there. In this case you cannot claim HRA tax benefit as HRA is paid for staying on rent for purpose of employment. However you can easily claim home loan tax benefit.

Can we claim HRA and home loan together for Tax Benefit?

As you can see, you can always claim tax benefit on HRA and home loan together, if your are actually paying rent (with all proofs) and also have home loan running. The only thing is you are prone to more scrutiny if your stay on rent in the same city where you have your own home. However, if the situation is genuine and all your rental transactions have records, you can always claim HRA and home loan together. Also in case your employer does not allow this you can directly do so in your income tax return form.