Many taxpayers living on rent and servicing home loan are confused if they can claim tax benefits on both Home Loan and House Rent Allowance (HRA) or not. As per the rules, you can claim tax benefits on both home loan and HRA in the same financial year. However, there are a few conditions to it, which we will discuss in this article.
HRA and Home Loan Tax Benefits
Many people buy houses on home loan but live on rent. A person in such a situation can claim tax benefits on:
- House Rent Allowance (HRA) towards house rent
- Home Loan Interest under Section 24 of the Income Tax Act
- Home Loan Principal Repayment under Section 80C of the Income Tax Act
However, to claim these home loan tax deductions and HRA tax deductions, you need to submit adequate proofs. In the absence of this, your deduction claims may be rejected. Therefore, you must have all related documentation (such as lease deeds and possession/completion letters) and justifications regarding the same ready to support your case.
Documents Required to Claim Tax Deductions on HRA
- Rent agreement/Rent receipts of a year.
- Each rent receipt should have a 1 Rupee revenue stamps and landlord’s signature
- Landlord’s PAN number is also mandatory
- If your landlord does not has PAN, you might be asked to submit a declaration from him/her stating the reason for not having PAN along with his/her address and contact number. Also, ask your landlord to fill the Form 60 and submit it along with your HRA claims
- Letter informing about the tenancy to the housing co-operative society
Documents Required to Claim Tax Deductions on Home Loan
- Provisional Interest Certificate from the financial institution mentioning the break-up of interest and the principal amount. The certificate should also have the loan sanction date and PAN.
- Possession Certificate copy.
- Sale Deed Copy (In case possession letter is not available)
- Lease deed copy, in case of let out property
- In case of Joint Home Loan, self-declaration of the ownership proportion needs to be furnished
Home Loan and HRA Tax Calculation
To calculate HRA for the tax deduction, the amount of HRA exemption will be the lowest of the following:
- Total HRA offered by the employer
- Actual rent paid – 10% of your basic salary
- 50% or 40% of the basic salary, depending on the place where you live
To understand this better, let’s take an example.
Example: Amit lives in Gurgaon in a rented apartment costing him Rs. 15,000 per month. His basic salary is Rs 40,000 and HRA is Rs 15,000. Aryan took a home loan to buy a house in Pune where his family lives. The interest he pays on the loan for his house is Rs 30,000 per month.
Amit can claim HRA Tax Deduction as follows:
The amount exempt to be taxed from HRA will be the minimum of these three:
HRA received = Rs. 15,000
40% of the basic salary = Rs. 16,000
Rent paid – 10% of Basic = Rs.15,000 – Rs. 4,000 = Rs. 11,000
The amount Rs. 11,000 will be exempted from HRA tax deduction as it is the lowest of the above. Thus, Rs. 4,000 (Rs. 15,000 – Rs. 11,000 = Rs. 4,000) will form the part of your taxable income.
Amit can claim the Home Loan Tax Deduction as follows:
The Home Loan tax exemption will be as per the following legal provision of the Income Tax Act:
- As per Section 24 of the Income Tax Act, home loan borrowers individually can claim tax benefit of upto Rs. 2 lakh per financial year (FY) on the Home Loan interest.
- As per Section 80C of the Income Tax Act, home loan borrowers solely can claim tax benefits of upto Rs. 1.5 lakh per FY on the repayment of the home loan principal amount.
Special Case of HRA Tax Exemption Under Section 80GG
You can claim tax deduction under Section 80GG towards the rent you pay under the following conditions:
- You are salaried and do not receive HRA from your employer
- You are self-employed
- You live on rent and pay for it
- You/your spouse/your minor child/HUF of which you are a member – do not own residential property at the location where you currently live, do job or business
Exception: Deduction under section 80GG is not allowed if you own a residential property anywhere for which your income from House Property is calculated under applicable sections as self-occupied property.
Deduction: The lowest amount of the following will be considered as a deduction:
- 5,000 per month
- 25% of the adjusted gross total income
- Total rent paid minus 10% of basic salary
Income to exclude: Long-term capital gain, short-term capital gain under Section 111A or 115D, Deduction under 80C to 80U and the deduction under Section 80GG.
How to avail: File Form 10BA with details of payment of rent.
Can Couples Claim Both HRA and Home Loan Tax Benefits?
The tax benefits on HRA and Home Loan are mutually exclusive. Therefore, both the husband and wife, individually, can claim tax benefits on housing loan based on the contribution made by each towards the home loan EMIs.
- All co-owners of the property will be co-applicants for Joint Home Loan.
- The Joint Home Loan borrowers can avail of this benefit only on the basis of their share of ownership.
- If the share of ownership is not specified, the interest amount of the loan EMI will be divided among co-borrowers equally.
- Since each co-applicant is eligible for the tax deduction, a couple taking Joint Home Loan will get a combined tax benefit of Rs. 4 lakh, provided the related conditions are met.
- Same as above, a couple taking a Joint Home Loan will get a combined tax benefit of Rs. 3 lakh (1.5 lakh each) deduction on home loan principal repayment.