Housing allowance (HRA) is a component received by salaried taxpayers to support the payment of rent for rented premises. It is permitted as an exemption from taxable wages under section 10(13A) of the Income Tax Act 1961 (the Act) subject to the satisfaction of several conditions. However, if a taxpayer does not pay rent or live in rented accommodation, the HRA allowance is considered fully taxable.
A taxpayer can claim the HRA exemption if the following conditions are met:
- The taxpayer is an employee;
- HRA is received as part of salary;
- The taxpayer resides in rented accommodation and pays rent;
- Proof of rent in the form of rent receipts or rental agreement is made available to the employer for the purpose of claiming exemption;
- If the rent paid by the employee is more than INR 100,000 per annum, it is mandatory for the taxpayer to report the landlord’s PAN to his employer.
The amount of HRA exemption available in a fiscal year (FY) must be the lesser of the following amounts:
- Actual housing allowance received; Where
- Rent paid less 10% of base salary; Where
- 40% of base salary (50% for rental accommodation in Delhi/Mumbai/Kolkata/Chennai).
Tax benefit on the Housing Loan paid
The home loan (EMI) consists of two parts, namely the repayment of the principal and the interest component. To encourage taxpayers to invest in home loans with the aim of providing housing to all Indian citizens, the government has provided the multiple tax benefits for home loans.
The interest portion of EMI paid for a financial year can be deducted from the taxpayers total income up to a maximum of INR 2 lakh under Section 24(b) of the Act. Also, the main part 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 this deduction, the taxpayer must present to the employer the certificate of interest from the bank or financial institution, specifying the allocation of interest, the pre-acquisition interest paid (if any) and the principal amount for a fiscal year.
How can a taxpayer claim the benefit of the HRA and the tax benefit for a mortgage loan together during the same financial year?
As a simple mechanism provided by the Indian Income Tax, a taxpayer is not eligible to claim the benefit of the HRA exemption if he owns a house where he also claims the interest deduction on the home loan paid. .
However, homeowners who pay off their home loan and receive the HRA as part of their salary may qualify for home ownership tax benefits in certain situations.
Some possible scenarios in which taxpayers can benefit from the HRA and the mortgage deduction simultaneously:
* Owning real estate and living in another rented house due to work or any other qualifying reason:
In the event that the owned premises and the rented accommodation are in different cities, the taxpayer can claim the benefit of both, i.e. the exemption from the HRA received from the employer as well as the deduction of interest/principal paid on the outstanding home loan for the owned property.
However, in the event that the owned premises and the rented accommodation are located in the same city, he can claim the benefits of the HRA exemption and the interest/principal deduction on the home loan taken out when there is a reason valid not to stay in the premises owned.
* When the taxpayer’s house is under construction and they live in rented accommodation (same/different city):
The taxpayer is entitled to claim both the benefits of the HRA and the interest component of the home loan relating to the house under construction.
The interest component paid while the dwelling house is under construction is known as pre-construction interest. Interest paid during the period from the date the money was borrowed to March 31 before the end of the fiscal year in which construction is completed may be claimed as a u/s 24(b) deduction in five equal installments . Installments can be claimed as a deduction from the fiscal year in which construction is completed, while claiming the HRA exemption.
* When the taxpayer rents his own house and lives on rent elsewhere:
If the person has rented their own home and lives in another rented property, they are still eligible to claim HRA benefits and interest/principal paid on the home loan. However, he must disclose his rental income from the leased property when calculating his taxable income.
In summary, employees who receive the HRA as part of their salary and who pay installments for the home loan are entitled to benefit from both the HRA exemption and the interest/principal repayment deduction on the loan. real estate subject to the realization of the scenarios mentioned above. In the event that the return is retrieved for review at a later stage of the assessment, the taxpayer may have to justify both of these deductions to the income tax officer (if questioned).
(By Akhil Chandna, Partner, and Sarthak Prashar, Principal at Grant Thornton Bharat LLP)