Make the most of HRA and home loan

Updated - May 19, 2016 05:42 am IST

Published - May 19, 2016 12:00 am IST

Anil Rego

Anil Rego

A common conundrum for most income tax payers is whether to buy a house or rent one, and what the tax implication will be for each option. Let us look at both and see how best one can save taxes under these heads.

HRA: House Rent Allowance

You can claim a deduction for rent paid without needing to receive HRA from the employer. However, business people or self-employed professionals cannot avail of this.

These are the tax-free limits: the minimum of the HRA from the company, actual rent paid minus 10% of the salary, and 50% of your salary (if in a metro and 40 per cent if elsewhere) is tax free.

Here’s an example: Let us assume you earn a basic salary of Rs. 30,000 per month and pay a rent of Rs. 10,000 per month, while the company offers you HRA of Rs. 12,000 per month. The tax benefit of HRA will be the lower of:

* HRA = Rs. 12,000

* Rent paid less 10% of basic salary = Rs. 12,000 - 3,000 = Rs. 9,000

* 50% of basic = Rs. 15,000

Hence, HRA in this case will be Rs 9,000 and the balance (Rs 12,000 - 9,000 = Rs 3,000) will be taxable.

It is important to note that HRA cannot be claimed for houses you own and live in, and even paying rent to a parent or spouse is frowned upon by the authorities.

Housing Loan

Eligibility for a home loan should be one of the first checks carried out by any prospective home owner, as this depends on the repayment capability, income levels, existing debts and age. The amount of loan sanctioned will vary from borrower to borrower and between banks. Since this is the most preferred method of purchasing a new home, it is advisable to check the eligibility early on in the process. There are various other things to look for — amount of loan, down payment, interest rate (floating/ fixed), repayment period, penalties/charges, etc.

The borrower also enjoys tax benefit on both interest and principal:

* Under Section 24 (b) of the Income Tax Act: The maximum permissible deduction of interest payable on the home loan is up to Rs. 2,00,000

* Under Section 80 (c) of the Act: The maximum permissible deduction of principal repaid on the home loan along with other savings and investments is eligible for tax deduction up to Rs. 1,50,000.

However, if the house you own is rented out, the entire interest component can be claimed as an income tax deduction.

Can both be claimed?

Now that we have understood how each of these work and what tax breaks are available, is it possible to club both? For example, you live in Bengaluru in a rented place, but are from Hyderabad, and own a house there — what then?

If your own house and rented house are in the same city, then it is not possible to claim both deductions. However, if you own a house in one city and live in another, then you will be able to claim both HRA as well as housing loan benefits.

Also, if you have recently bought a house in the city where you live in a rented property, and the new house is still under construction, then you can claim HRA benefits till such time as the new property is completed.

The option of claiming both is also available if your own house is rented out and you stay in a rented property. In this case you will have to declare rental on your property as income and pay income tax on that. If your own house is not rented out but vacant, then you need to pay tax on a notional rent on this.

The writer is CEO, Right Horizons

If you own a house in one city and live in another, then you can claim HRA and housing loan benefits

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