Get HRA Exemption and Home Loan Deduction

March 21 , 2013

Many tax queries about HRA are centered on whether a person can get both HRA exemption and home loan interest deduction, especially if one owns a house in the same place where he works. The answer works out to be- Yes! There is nothing stopping you from getting HRA tax benefits as well as home loan deductions as long as you are staying on rent in a different house.

You probably might have heard or read things contrary to this. The fact is that Income Tax laws on HRA and home loan interest deduction are separate and one does not talk anything about the other. It is best to look at Income Tax Laws themselves dealing with HRA and housing loan settle it at once.

Conditions for HRA exemption

You find HRA exemption mentioned in section 10(13A) of the Income Tax Act. It says that any allowance granted to you by your employer for payment of rent for your residential accommodation, regardless of what it is called (HRA) is exempt from your annual income. This means your HRA component is not to be added to your total income for computing income tax.

Section 10(13A) goes on to say that this exemption will not be available if you live in a house owned by you or are not actually paying any rent. Even if you have part ownership in the house you cannot claim HRA exemption.

Rule 2A of Income Tax Act which deals with how HRA exemption is to be computed tells that it is taken as the lowest of these 3 numbers: actual HRA, rent paid minus 10% of basic salary and 50% of basic salary. So from this clause you have one more condition- if the rent paid is less than 10% of basic salary you cannot claim HRA tax exemption.

Besides these, there are no other conditions applying to HRA exemption in the Law. Now going on to the Laws dealing with Interest deduction.

Conditions for home loan interest deduction

Section 24(b) mentions home loan interest deduction. It says if you have borrowed any amount for buying, building, renewing, repairing or reconstructing a house you can claim the interest payable in that year for income tax deduction. In order words you can subtract the interest payable from income from house property.

You need to own the house. Joint-loan borrowers who are joint-owners can claim this deduction up to their share in the loan.

There is nothing in this section forbidding you from getting home loan interest deduction if you are claiming HRA or any other tax benefit. The section that deals with computing income from house property only says that in case of self occupied property where the value is taken to be nil, the owner should not be living in an owned house in another place where he usually is for employment or business purpose. You can claim that another place could be elsewhere in the same city, town or locality.

Claim tax rebate on both HRA and home loan interest payment

So you could be paying home loan EMI for a house you own in a particular city and be living in another city or even the same city on rent. If you get HRA from your company you are eligible to get both HRA exemption and home loan interest deduction. There can be some interesting situations:

1. If you are staying on rent in a place belonging to a relative, say parents or siblings and you own another house for which EMIs are being paid. You can still get both tax rebates. Just make sure that your parents or siblings are filing I-T returns. There should be a genuine reason for staying on rent in a close relative's house (say because it's convenient for commuting to work) else the tax authorities might suspect the transaction to be a tax-evading trick.

2. You live in a house owned by your spouse and pay him/her rent. Technically speaking you would be eligible for HRA exemption. Although one can contend that Income Tax laws do not prohibit you from claiming HRA benefit here you might rather avoid this twist. Firstly because there is no commercial interest between spouses unless they are living apart and the transaction can be questioned by the tax guys. They might consider it a sham transaction. Secondly even if your spouse is registered as owner, if you had actually contributed to the cost of the house you are the real owner of the house. Therefore rental income received by the spouse will be clubbed with yours, under section 64, and you would have to pay tax on income from house property.

3. You are paying EMIs for your house and also pay rent for your parents' accommodation in a different place. In this case you cannot get HRA exemption since it is only available where the rent is being paid for your accommodation.

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