Understanding HRA Tax Benefits

With the increasing prices in the real estate industry, it makes sense to borrow money through a home loan and acquire and own a house and pay EMI instead of renting a house.

While there are several tax exemptions are available on a home loan. House Rent Allowance (HRA) is an element present in the salary structure for most of the employees. Basically, HRA is the amount paid to an employee by the employer to rent a house. As a taxpayer, one can claim tax deductions on the amount one pay as home rent for accommodation each year. HRA exemptions can also be claimed under Section 10 (13A) of the Income Tax Act.

In this article, we are going to compare the tax benefits available for Home Loans and Tax benefits available for HRA.

Let’s have look at the Tax Exemptions for HRA

The amount of tax exemption from HRA will be a minimum of these three:

1. The actual HRA received from the employer

2. 50% of the salary if the employee lives in a metro city & 40% of the salary if the employee lives in a non-metro city.

3. Actual rent paid minus 10% of the salary. The salary from which it will be subtracted includes basic+ DA + turn around the commission.

Let’s us understand this with an example-

Mayur is working in Bangalore, hiss basic salary is ₹ 40,000. He lives in a rented house and pays a rent of ₹10,000 per month. He gets an HRA allowance of ₹ 15,000 from his employer.

Mayur can claim a Tax deduction for HRA as follows:

The amount of tax exemption from HRA will be a minimum of these three:

The actual HRA received, which is = ₹15,000

50% of the Basic since he lives in Bangalore = ₹ 20,000

Rent paid – 10% of the Basic salary = Rs.10, 000 – ₹ 4,000 = ₹ 6,000

Therefore HRA exempt that can be vailed = Rs.6, 000.

The Remaining HRA, which is HRA received from the company minus the minimum of three =₹ 15,000 – ₹ 6,000 = ₹9,000

Here, remaining ₹ 9000 will come as the part of his taxable income under Salaries on account of HRA.

Tax Exemptions for Home Loans

Home loans are one of the convenient options which turns your dream of owning a house into reality. The loan is widely available with all the top banks and NBFCs. Apart from this, there are several tax benefits available associated with a home loan.

  • Under section 80 C

Under this section of the income tax act, a home loan borrower can avail a tax benefit of 1.5 lakh on the principal repayment.

  • Under section 24 b

Under this section of the income tax act, one can get a tax exemption up to 2 lakhs on the interest paid in case of self-occupied property and even more than that in case of a rented property.

So, one can avail a tax exemption of 3.5 lakh on a home loan, but if you have a joint home loan and your co-borrower is your co-applicant as well then both can claim a tax deduction of 3.5 lakhs individually. So, in case of a joint home loan, a total of ₹ 7 lakh can be claimed for a tax deduction.

Can HRA and Home Loan can be Claimed together for Tax exemption?

Yes! HRA and a home loan can together be claimed for tax exemption. But, this is possible under some particular scenarios-

  1. In case the property purchased by using home loan is in a different city and you have to live in a different city due to a job change or any valid reason.
  2. When you take a home loan for an under-construction property, and hence you have to live in a rented house till the construction is over and you get the possession of the new house.
  3. When you have rented the property which you purchased through a home loan, and you are again living in a rented house. This is allowed but only for a valid reason, such as u shifted to a rented house as there as less space for your family in the new house, or due to location issue.

To avail both benefits together, you may need to explain your employer or the income tax department when questioned. The second important thing required to avail both of this together is, you must have relevant documents to prove your worthiness.