All about HRA Exemption

House Rent Allowance (HRA) is an allowance given by an employer to an employee. The sole purpose of this is to meet the cost of renting a home.

You can claim the HRA tax benefits only if

• You have a HRA component in your salary structure.
• You are staying in a rented accommodation.
• Rent exceeds 10% of your salary ( Basic + Dearness allowance (DA) ).

To take this benefit you either need to submit the original rent receipts or the registered rent agreement. This is mandatory only if your rent exceeds Rs 3000 though. If you are living with your parents and paying rent to them, then you can claim the tax benefit on that also. Please remember that your land lord or your parents need to show this as rental income in their returns. So, even if you are not actually paying rent to your parents, you could still take rent receipts signed by your parents and claim the tax benefit. If your parents fall in lower tax breaks then it would be beneficial to you as a family. At the same time rent paid to spouse can not be claimed as the relationship between husband and wife is not commercial in nature (according to income tax dept of India).

The actual HRA tax benefit you can be entitled to is the minimum of

• The actual amount of HRA received from the employer.
• 40% your salary ( Basic + DA ) . This increases to 50% if you are living in a metro.
• Rent - 10% of salary (Basic + DA ).

Tax on remaining amount ( HRA - (Tax exemption on HRA)) needs to be paid.

Home Loan Tax Benifit

The EMI you pay for the home loan has two components : Principal , Interest.

The principal repayment you make on your home loan is eligible for income deduction under Section 80C. The amount paid towards stamp duty, registration fee and other expenses for the purpose of transfer of such house property -- if they follow income tax norms (not towards admission fee, repairs, expenditures for which deduction is allowable under the provisions of section 24) -- can also come under this deduction. As most of the people know, there is a cap of 1 lack on section 80C. This 80C benefit is basically for self occupied home (You can still get this benefit under some circumstances even if it is not self occupied but not rented out -- explained later)

Under section 24 , the interest paid on the home loan is also tax exempted. If the house is self occupied then the maximum exemption would be 1.5 L. If the property is not self occupied (may be rented out or used by your parents etc) then there is no cap on this. Please note that, the interest paid on the home loan is not directly deductible from your income. You need to show this as "income from other sources" with a negative value.

HRA vs Home Loan

•  If you are staying in the same house for which you have taken the loan, then there is no question HRA benefit. You will not get it as you are staying in your own house and to get the benefit you need to stay in a rented place. You can enjoy 80c and section 24 benefits.

• If you taken a home loan, then you can still enjoy the HRA benefit for some genuine reasons ( if you staying in a rented house because the house you have taken loan on is in a different city or distant from your work space or smaller for your convenience or your parents staying there. ). However it is necessary that you have some of your belongings there at your home (the one you own) and you stay there on and off on during weekends and holidays. Despite this, if your employer does not agree and denies your tax benefits, you will have to claim it at the time of filing your tax returns. You can also enjoy the 80c benefit in these cases. Section 24 also applies here and there will not be any cap of 1.5L.

• Please note that, if you have rented out the house you have taken a loan on and you are staying in another rented house, then you can get the benefit of HRA but you will not be entitled to get a deduction on principal amount you have paid under section 80c as it is not valid if the property is rented. Section 24 applies though and there will not be any cap of 1.5L.

• If you have taken two home loans ( or more than one) still you can enjoy the HRA decided by the above rules. You will get section 24 benefit on both the houses but 80c benifit would only applies for houses which were not rented out and have genuine reasons for not self occupying as explained above.

• If you have rented out the house you need to show the rental income as "income from other sources". 30% of it would be standard deduction, so you dont need to pay tax on that. You pay tax on the remaining 70%. And, if you have not rented it out and also not staying there you need to pay tax on notional value (rent you would have got, if you gave the house on rent). This values will be decided by the corporation/municipal depending on the city and location.

• Please note that, the interest paid on the home loan is not directly deductible from your income. You need to show this as "income from other sources" with a negative value. This can be done in 12A form.

If you have any doubts just leave a comment with your e-mail id. I will try to accommodate the answer in this post and inform you.

Thanks,

Ahmed