Is It Possible to Claim a Tax Deduction on Home Loan and HRA Both?
Yes, it is! Although it may seem counter intuitive that you can claim a tax deduction for both your Home Loan as well as house rent allowance (HRA). However, there are a few circumstances under which you can do this.
No specific tax law restricts you from claiming both benefits at the same time.
How can you claim tax benefits on house rent allowance?
You can only avail tax benefits on HRA if your employer provides you with HRA. This facility is not available for someone who is self-employed. To avail this benefit, the employee would have to first pay the rent for the residential property that they are currently residing in.
A single individual can avail this total benefit, and it cannot be shared between two persons even if the other person is a dependant of the assessee. However, if two persons are paying the rent, then each can apply for tax benefits equal to the amount of rent each person pays. Also, you cannot claim a tax deduction if the assessee partly or entirely owns the accommodation.
Rule 2A of the Income Tax rules states that the benefits of HRA can be restricted to the lowest of the following amounts –
- The actual HRA received.
- Excess rent that is paid amounting to more than 10% of the basic salary.
- 50% of the principal wage if the employee resides in any one of the metro cities or 40% for any other city.
How can you claim tax benefits on Home Loans?
The primary condition for claiming tax benefits on a Home Loan is that the person should be the owner of the said property as per Section 80C and Section 24 (b). Also, under Section 80C tax benefits can only be availed if the loan was taken from a specific person for a residential house. There are also various interest benefits that can be availed on both commercial as well as residential properties, along with the money that was borrowed from a bank or another individual. Any interest on money borrowed for a property that is let out is fully deductible. If the property is self-occupied benefits on the interest paid is restricted to only 2 Lakhs per year.
Conditions to claim tax benefits of both HRA as well as Home Loans
Tax law allows the payer to have multiple house properties. However, the payer can only choose one house as self-occupied, and the others are all considered as notional rent (i.e., the government recognizes it as a property through which you are getting rent.)
However, there are a few conditions under which you can claim HRA and Home Loan tax deductions –
- The house that you own and the one in which you reside and pay rent for should be in different cities, and there should be a valid reason as to why you do not live in your own house. Acceptable reasons are that you work in a different city or that the home you own is far away from where you work.
- If the house that you are paying the loan for is under construction and you need to live in a rented house till it is done. In this case, the benefits of tax deduction can only be claimed on the interest of the loan, and it can be claimed in five instalments in the years after you get possession of the house.
- If the house that you have bought and are paying the loan for does not suit your needs, for example, if the house is too small. However, in this case, you would also have to disclose the amount of rent that you are getting for the house that you own.
- If your children are studying in the area where the rented house is located and they are not able to shift to the house that you have bought.
- If you have recently moved from your rented home to the house, you own in the middle of the year or vice versa.
- If you work in one city then live in a rented house there, and your family lives in another city, so you have bought a house in that location and needed to Apply For a Home Loan.
If any of the above conditions are similar to your situation, then you qualify to claim deductions on both HRA as well as Home Loans.
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