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Claim HRA and Home Loan Interest – Tax Deduction

HRA – House Rent allowance.

HRA or House Rent Allowance is a common component of an employee’s salary package. It is given by an employer to help the employee meet the cost of renting a home. Actual rent paid minus 10% of salary. 50% of basic salary for those residing in metro cities and 40% for those living in non-metro cities.

Sounds difficult? Here is how you roll it!

The deduction available is the least of the following amounts:

  1. Actual HRA received;
  2. 50% of [basic salary + DA] for those living in metro cities (40% for non-metros); or
  3. Actual rent paid less 10% of basic salary + DA

Lets’s understand this better, with more cases in picture.

Case 1: If pay rent for any residential accommodation occupied by you, but do not receive HRA from your employer, you can still claim the deduction under Section 80GG. Conditions that must be fulfilled to claim this deduction:

  1. You are self-employed or salaried
  2. You have not received HRA at any time during the year for which you are claiming 80GG
  3. You or your spouse or your minor child or HUF of which you are a member – do not own any residential accommodation at the place where you currently reside, perform duties of office, or employment or carry on business or profession.

 

Case 2: In case you own any residential property at any place other than the place mentioned above, then you should not claim the benefit of that property as self-occupied. The other property would be deemed to be let out in order to claim the 80GG deduction.

The least of the will be considered as the deduction under this section:

  1. Rs 5,000 per month;
  2. 25% of adjusted total income*;
  3. Actual Rent less 10% of adjusted total Income*

 

Case 3: Adjusted Total Income means Total Income Less long-term capital gain, short-term capital gain under section 111A and Income under section 115A or 115D and deductions 80C to 80U (except deduction under section 80GG).

Let’s understand this with an example. Madhu works in an MNC in Bangalore. Though her company provides her with HRA, she lives with her parents in their house and not in rented accommodation. How can she make use of this allowance? Madhu can pay rent to her parents and claim the allowance provided. All she has to do is enter into a rental agreement with her parents and transfer money to them every month.

This way Madhu can make a nice gesture to her parents while saving on taxes. Her parents will have to show the rent she paid on their income tax returns. However, they can save a lot as a family.

Home loan interest

A home loan is an amount of money that an individual borrows from a bank or money lending company at a certain rate of interest to be paid with the EMI every month. The property is taken as a security by the money lending company for the Home Loan.

  • The property can either be commercial or personal in nature.
  • When the borrower cannot pay the dues, the lender will possess all the legal rights to recover the outstanding loan amount by sale of the property in question.

Types of Home Loans:

  • Home Purchase Loan: This is the loan that one takes for purchasing a home.
  • Home Improvement Loan: This loan covers expenditure related to repairs of your home or even renovation.
  • Home Construction Loan: This loan comes in handy when you are building a new house.
  • Land Purchase Loan: Someone wishing to buy a plot of land for constructing his/her own house can avail this loan.
  • Home Extension Loan: Suppose you plan to add another room, garage, bathroom or kitchen to your home. This is the loan that you should apply for and this also comes in handy if you are planning to have another floor.
  • Joint Home Loan: These are loans taken by two people or even more. For instance, spouses can apply for joint home loans.
  • Home Loan Balance Transfer: You can use this mechanism to switch your outstanding loan amount to a different lender with better terms and conditions and lower interest.
  • Top Up Home Loan: This kind of loan helps you borrow some more money above the outstanding loan amount. There are attractive rates of interest offered by Bajaj Finserv in case of top-up loans.

Tax deduction

Let’s get this right. A tax deduction is a deduction that lowers a person’s tax liability by lowering his taxable income. Deductions are typically expensive that the taxpayer incurs during the year that can be applied against or subtracted from his gross income in order to figure out how much tax is owed.

Often people misconstrue that the funds grow as you top it without filing the taxes. A tax deduction is a deduction that lowers a person’s tax liability by lowering his taxable income. Deductions are typically expensive that the taxpayer incurs during the year that can be applied against or subtracted from his gross income in order to figure out how much tax is owed.

Tax credits and deductions are commonly confused, but each affect your refund in a different way. Tax deductions reduce the amount of income you’ll be taxed on. If you make $45,000 and claim $2,000 in deductions, you’ll be taxed as if you made $43,000 when you file. The IRS will pay you the difference in your refund.

What kind of expenses can I write off?

  • Car and truck expenses. Most small businesses use a vehicle, such as a car, light truck or van.
  • Salaries and wages.
  • Contract labor.
  • Supplies.
  • Depreciation.
  • Rent on business property.
  • Utilities.

Taxes.

 

How do we calculate?

Multiply the cost of an item or service by the sales tax in order to find out the total cost. The equation looks like this: Item or service cost x sales tax (in decimal form) = total sales tax.

Once you’ve calculated sales tax, make sure to add it to the original cost to get the total cost.

When to claim both HRA and Home loan interest?

You can:

Claim HRA from salary package towards rent payment.

Claim tax deduction on home loan principal repayment under Section 80C up to Rs 1.5 Lakhs a year.

Claim tax deduction on home loan interest repayment under Section 24 up to Rs 2 Lakhs a year.

You Have a House in Another City: Let’s understand this with an example. Ramesh works in a Company in Mumbai and stays in a rented apartment. He has bought an apartment in Bengaluru for which he has availed a home loan. Now, Ramesh cannot stay in his house in Bengaluru as he is working in Mumbai. He can claim both HRA from salary (assuming this is part of the package) and Home Loan Principal and Interest tax benefits.

When Your House is Under Construction: Let’s say you have availed a home loan to construct your house. You can claim a HRA deduction on salary. After your house is constructed, you can claim tax benefits on home loan interest paid till the date of house completion.

You have a House But Cannot Move in: You may own a house, but it’s far away from the workplace. You would take a rented house/apartment near the workplace. You can claim both HRA and home loan tax benefits. (House and place of work must be separated by at least 35 Kms to get this benefit).

You Reside in a Rented House and Rent Your Own House: You buy an apartment/house availing a home loan. You then stay in a rented apartment, and give your house on rent. Then, you may claim the HRA deduction on rent paid and also the interest paid on home loan for the house you have rented out. You set off home loan interest against rental income.

 

How to claim both?

 

Apparently, Yes, you can claim both HRA and Home Loan Interest Tax Deduction. To claim HRA deduction, you must pay rent. HRA and Home Rent fall under different sections of the Income Tax Act. HRA Exemption can be claimed under Section 10(13A) of the Income Tax Act. Claim tax benefit on home loan principal repayment under Section 80C and home loan interest repayment under Section 24B.

 

 

Documents to Claim Tax Deduction on Home Loan

 

  • Collect the provisional interest certificate from the bank, which shows home loan principal and interest break-up.
  • The certificate has the home loan sanction date and PAN.
  • Possession or Sale Deed Copy. Lease Deed copy for let out property.
  • For joint home loan, the declaration of ownership proportion must be furnished.

 

 

 

 

 

 

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