What Is The Difference Between HRA & Home Loan When It Comes To Income Tax?

Living on rent or putting up in a self-owned house is a common conundrum for the salaried class. And Jatin Gandhi was no different. Jatin was living on rent but had recently bought an under-construction apartment in Navi Mumbai. As the financial year draws to a close, Jatin is baffled if he could claim both HRA as well as home loan tax deduction. His chartered accountant told him that he could but only if he meets certain conditions. MakaaniQ tells you how one can save taxes under these heads.

The equated monthly instalment (EMI) against your home loan comprises of principal repayment and interest on the outstanding loan. All three—principal paid, interest payment and HRA—can be claimed as an exemption under separate sections of the Income-tax Act. However, there are certain conditions that you need to fulfil.

Savings and taxes

Under the income tax rules, a taxpayer can claim exemption on a couple of investments and expenses on his gross income. The HRA or the house rent allowance and home loan deductions fall under separate sections in the income-tax Act. Section 10(13A) Rule 2A talks about HRA while home loan tax benefits are listed under section 80C (tax benefit on principal repayment) and Section 24 (tax benefit on interest payment) of the said Act. 

House Rent Allowance

The HRA is the tax concession given to employees for what they pay towards rented accommodation every year. 

The HRA can be claimed as the minimum of HRA received from the employer or 50 per cent of the salary for employees living in metros (40 per cent elsewhere) or actual rent paid minus 10 per cent of the salary.

Also read: Govt's HRA Move To Push India's Rental Market

For instance, your basic salary is Rs 30,000 per month and you pay a rent of Rs 10,000 per month in Mumbai. Your employer offers you HRA of Rs 15,000 per month. The tax benefit will be:

• HRA = Rs 15,000
• Rent paid less 10 per cent of basic salary = Rs 10,000 - 3,000 = Rs 7,000
• 50 per cent of basic = Rs 15,000

So, the HRA will be Rs 7,000 and the balance (Rs 15,000 - 7,000 = Rs 8,000) will be taxable.

Home loan

Similarly, for principal repayment exemption the limit is Rs 1.5 lakh under section 80C, or the actual principal repaid, whichever is less.

The interest repayment part has been capped at Rs 2 lakh or the actual interest paid, whichever is less, under section 24b. 

Understanding the fundamentals

“It is important to remember that HRA cannot be claimed if you own and live in that house,” says chartered accountant, Manjeet Chahal. “Although paying rent to a parent or spouse is not illegal, the problem is people don't complete the transaction cycle. This means that the rent paid is to be reflected in the income of the recipient. This is seldom done, so it becomes a case of tax evasion,” she adds.

You are entitled to claim HRA exemption if you are living on rent and repaying home loan provided you meet certain conditions. For example, if you have bought a house through home loan and staying in it, you can't claim HRA but are entitled to claim tax benefits on both the principal and interest. 

Also read: Budget 2017 Restricts Tax Benefits Enjoyed By Landlords

In another scenario, if you have a house bought on a loan but live in another house on rent, you can claim tax benefit for both. But there is a rider: If the house that you have bought and the rented house are in the same city, you should be able to give a plausible explanation to your company or the taxman in case there is a scrutiny of the details that you have provided.