House Rent Allowance (HRA) is a component received by salaried taxpayers to bear the rental payment of the hired premises. It is allowed as an exemption from taxable salary under Section 10(13A) of the Income-Tax Act, 1961 (the Act) on satisfaction of several conditions. However, if a taxpayer does not pay rent or live in a rented accommodation, the HRA allowance is treated as fully taxable.
A taxpayer can claim the exemption of HRA if the following conditions are satisfied:
- The taxpayer is a salaried employee;
- HRA is received as a part of the salary;
- The taxpayer resides in a rented accommodation and pays rent;
- Proof of rent in form of rent receipts or rental agreement is made available to the employer for claiming exemption purposes;
- If the rent paid by the employee is more than INR 1,00,000 per annum, it is mandatory for taxpayer to declare the landlord’s PAN to his employer.
The amount of HRA exemption available in a financial year (FY) shall be the least of the following:
- Actual house rent allowance received; or
- Rent paid less 10% of the basic salary; or
- 40% of basic salary (50% for rented accommodation in Delhi/Mumbai/Kolkata/Chennai).
Tax benefit on the Home Loan paid
The home loan (EMI) comprises of two parts i.e., principal repayment and interest component. To encourage the taxpayers to invest in housing loan with a dream to provide a housing to all Indian citizens, the government has provided the multiple tax benefits for housing loan.
The interest portion of the EMI paid for a FY can be claimed as a deduction from taxpayers’ total income up to a maximum of INR 2 lakh under section 24(b) of Act. Further, the principal portion of the EMI paid for the year is allowed as a deduction under Section 80C up to INR 1.5 lakh.
In order to claim such deduction, the taxpayer should submit the interest certificate from the bank or financial institution to the employer, specifying the break-up of interest, pre-acquisition interest paid (if any) and the principal amount for a financial year.
How can taxpayer claim the benefit of HRA and Home Loan tax benefit together in the same financial year?
As a straightforward mechanism provided under the Indian income tax, a taxpayer is not eligible to claim the benefit of HRA exemption if he owns a house property where he is claiming the deduction of interest on home loan paid as well.
However, homeowners who are paying their home loan and receiving HRA as part of their salary, can avail both the house property-related tax benefits in certain situations.
Possible few scenarios wherein taxpayers can avail the benefit of HRA and deduction for home loan simultaneously:
* Owning a house property and living in another rented house owing to his work or any other eligible reason:
In case the owned premise and rented accommodation are in different cities, the taxpayer can claim the benefit of both i.e., exemption of the HRA received from the employer as well as the deduction of interest/principal paid on the on-going home loan for the self-owned property.
However, in case the owned premise and rented accommodation are located in the same city, he can claim the benefits of HRA exemption and deduction of interest/principal on home loan taken wherein there is a genuine reason for not staying in the owned premise.
* When the taxpayer’s house is under construction and is living in a rented accommodation (same/different city):
The taxpayer is eligible to claim both the benefits of HRA and interest component of home loan pertaining to the under-construction house.
Interest component paid while the residential house is under construction is known as pre-construction interest. The interest paid during the period from the date of borrowing the money to 31st March before end of the financial year in which construction is completed can be claimed as deduction u/s 24(b) in five equal instalments. The instalments can be claimed as deduction starting from the financial year in which construction is completed along with claiming the HRA exemption.
* When the taxpayer is renting his own house and living on rent elsewhere:
Wherein the person has rented out his own house and is living in some other rented property, he is still eligible to claim the benefits of HRA and interest/principal paid on home loan. However, he should disclose his rental receipts from the let-out property while calculating his taxable income.
To summarize, salaried employees receiving HRA as a part of their salary and paying installments towards the home loan are allowed to avail the benefit of both the HRA exemption and interest/principal repayment deduction on the home loan subject to fulfillment of the scenarios mentioned above. In case the return is picked up for scrutiny at a later stage of assessment, the taxpayer may have to substantiate both these deductions to the income tax officer (if questioned).
(By Akhil Chandna, Partner, and Sarthak Prashar, Manager at Grant Thornton Bharat LLP)