Connecting House Rent Allowance and Interest on Home Loan…

HRA – Salaried individuals who live in rented accommodation can avail the benefit of this deduction. The extent of deduction which can be availed is subject to the provisions of section 10(13A) of the Income-tax Act, 1961.

Interest on a home loan – Homeowners can claim a deduction of interest on a home loan if the owner or his family resides in the house property. The deduction can also be claimed when the house is vacant. The extent of deduction which can be availed is subject to the provisions of section 24(b) of the Income-tax Act, 1961.

On a plain reading of the text, it may seem that one cannot claim the benefit of both HRA and Interest on a home loan together, as, the former is a deduction allowable in respect of rented accommodation and the latter is a deduction allowable in respect of an owned house property.

However, salaried individuals can claim both deductions. Following are some of the circumstances in which one can avail the benefit of both the deductions:

1. The rented accommodation and the house property owned are located in different cities i.e., one may own a house in Pune, but, live in a rented accommodation in Mumbai;
2. The house property purchased is under-construction, and during the period of construction, one lives in rented accommodation. Interest deduction in such a case can be claimed in five equal installments over the years, after getting possession of the house; and
3. One has rented the house property which is on loan and lives in another house taken on rent.

Following are the provisions and limits as per the Income Tax Act, 1961 for claiming deduction u/s 10(13A) and 24(b):

Deduction u/s 10(13A) – Lower of the three is allowable

1. Actual HRA received from the employer;
2. 50% of salary, 50% of salary if the employee lives in a metro city; and 40% if the employee lives in a city other than a metro, and
3. Actual rent paid minus 10% of salary (basic plus dearness allowance plus turnover-based commission)

Deduction u/s 24(b)

1. In respect of the self-occupied house property, the maximum allowable deduction is Rs. 2 lakhs
2. In respect of a let-out house property, the entire interest is allowable as a deduction. However, the net loss from house property shall be limited to Rs. 2 lakhs.
3. Pre-construction interest is allowed in 5 equal installments, starting from the year in which the house is purchased or construction is complete.

Source: IIFL