HRA and its exemption

1.1. What is HRA?
Let us first understand what an HRA exactly is. HRA is a special allowance paid as a part of one’s salary by his employer to meet the rental expenses of accommodation in that city.

1.2. Conditions for claiming HRA exemption
HRA is fully taxable in the employee’s hands under both the new and old regimes of the Act. However, in the old regime, he may claim an exemption of such an allowance as per Section 10(13A) of the Act to lower their taxes if all the followings conditions are fulfilled:

  • The taxpayer is a salaried employee
  • HRA is received as a part of the salary
  • The taxpayer resides in rented accommodation
  • Rent receipts or rental agreement is made available to the employer
  • If the rent paid by the employee is more than INR 1,00,000 per annum, it is mandatory for him to declare the landlord’s PAN to his employer. If PAN is not available, the landlord must provide you with a declaration to this effect along with his name and address, which the employee should file with his employer.
  • If the landlord is not an Indian resident (an NRI), a tax of 31.2% (base rate of 30% plus a cess of 4%) has been deducted at the source before making the rent payment.

1.3. Maximum HRA exemption that one can claim
The taxpayer may receive only a partial exemption in respect of the HRA received. The amount of HRA exemption available shall be the least of the following:

  • Actual allowance received during the relevant period or
  • Rent paid - 10% of the salary for the relevant period or
  • 40% of salary (50% for rented accommodation in Delhi/Mumbai/Kolkata/Chennai) for the relevant period.

“Relevant period“ here means the period during which the taxpayer occupied the said accommodation during the year. If he occupied different accommodations for different periods, we split the year into segments and then compute the exemption for such segments separately.

Tax benefits on home loan

If a taxpayer is servicing a home loan for acquisition or construction of a house property, he can avail various tax benefits such as tax deduction on:

  • a) Principal repayment of home loan under section 80C of the Act,
  • b) Payment of interest under section 24(b) of the Act, and
  • c) Payment of interest under section 80EEA or 80EE of the Act.
Tax deduction of Amount of benefit Section under the Act
Principal repayment of the loan (also includes any pre-payment amount) Up to INR 1.5 lacs 80C
Interest payment Let out property: Actual interest without any limit
Self-occupied property: INR 2 lacs / INR 30,000 if certain conditions, explained later, are not met		 24(b)
Interest payment INR 50,000/ INR 1.5 lacs 80EE / 80 EEA respectively

2.1. Tax deduction on principal repayment of a loan
The taxpayer can claim a maximum deduction of INR 1.5 lacs regarding principal repayment of loan serviced for construction or purchase of a house property. He may also claim the stamp duty and registration charges under the same limit only once for that particular loan.
Note: If the taxpayer sells/transfers the house before the expiry of five years from the end of the Financial Year(FY) in which the construction was completed or purchase was made, the deductions allowed earlier will be added to his income in the year of sale.

2.2. Tax deduction on interest under section 24(b) of the Act
A taxpayer can avail deduction on interest paid/payable regarding a home loan as per 24(b) of the Act. Such a deduction is allowed on an accrual basis, i.e. it is allowed even if the interest is not actually paid.
The term interest includes pre-payment charges, service fees, brokerage, commission etc.
However, interest on unpaid interest or penalty for the same shall not be allowed as a deduction.

The maximum amount of deduction available is as follows:

(i) For under-construction property: The interest paid during construction shall not be allowed until the year of completion of such construction. Such pre-construction interest shall be allowed in 5 equal instalments from the FY in which construction or purchase is completed.

E.g. Mr A took a loan of INR 10 lacs in May 2017. The interest payable was INR 10,000 per month. The construction was completed in May 2021. Mr A was not eligible to claim a deduction of interest payment made from May 2017 to May 2021 in those years. However, he shall be eligible to claim a deduction of INR 94000 from FY 2021-22 to FY 2025-26 (i.e. total interest payment of INR 4.7 lacs from May 2017 to March 2021 in 5 equal instalments)

(ii) Any other case (i.e. entirely constructed or purchase of ‘ready to move-in’ homes:

Type of house property as per the Act Maximum deduction available
Let out property The actual interest paid.
However, a maximum loss of INR 2 lacs can be set off, and the balance shall be carried forward.
Self-occupied property: Loan serviced for Acquisition/ construction INR 2 lacs provided all the conditions specified below are fulfilled.
Self-occupied property:
  1. Loan serviced for repairs, renewals or reconstruction
  2. If conditions specified below are not fulfilled
 INR 30,000
Deemed let out property. INR 2 lacs provided all the conditions specified below are fulfilled.

The limit of INR 2 lacs shall be reduced to INR 30,000 if any of the following conditions are not met:
a) The home loan must be for either purchase or construction of a house property;
b) The loan is taken on or after 1 April 1999;
c) The purchase or construction shall be completed within five years. The five-year period shall be computed from the end of the FY in which the loan was taken. (e.g. if the loan was taken on 1 July 2020, then construction must be completed within five years from 31 March 2021, .i.e. on or before 31 March 2026)

The government has provided a major relief through Finance Act, 2019, wherein taxpayers can now declare two house properties as self-occupied as against one. Therefore, a taxpayer can claim interest deduction in respect of a home loan for up to two properties.

Note: The deduction is available taxpayer wise and not property wise .i.e, to say, if you own two properties, the deduction will be available to a taxpayer as per the limits given above. It will not be available for both properties separately. Therefore, in the case of joint ownership in house properties, each person paying the interest or repaying the principal amount shall be eligible to claim the entire deduction of the amount paid.

2.3. Interest payment under section 80EE or 80EEA of the Act
To incentivise house purchase, the government introduced section 80EE and 80EEA subsequently for first time home buyers. Deduction of interest paid on a housing loan is allowed over and above the deduction of section 24(b), as explained earlier. The comparisons of benefits provided under both these sections are tabulated below:

Particulars 80EE 80EEA
Eligible assessee who can claim the benefits of the section Individuals
i.e. partnership firm, Hindu Undivided Family (HUF), company, Association of Persons(AOP), Body of Individuals (BOI) etc. cannot claim the benefits under this section		 Individuals. Only those who are not eligible to claim deduction under section 80EE.
Deduction allowed Actual interest or
INR 50,000
Whichever is less		 Actual interest or
INR 1.5 lacs
Whichever is less
The loan sanction period covered 01-April-2016 to 31-March-2017 01-April-2019 to 31-March-2022
Amount of loan Up to INR 35 lacs Not mentioned
Stamp duty value of the property Up to INR 50 lacs Up to INR 45 lakhs
Source of loan Financial Institution (Financial institution means- Bank/Banking Company/Banking Institution/Housing Finance Company)
Purpose Acquisition of a residential house property
Other conditions The assessee is not in possession of any other residential house property on the date of sanction of loan.
Lock-in-period (period up to which one cannot sell the said house property) None

Claim for both HRA exemption and interest on home loan

An employee shall claim both HRA and the interest on a home loan as both these provisions are independent of each other. Possible scenarios that may arise and whether the Act permits the taxpayer to claim the benefit of both:

Scenarios Whether the taxpayer can avail of both HRA exemption and deduction of interest on the home loan? Example
When the taxpayer owns a house property but resides in a  rented house in a different city owing to work or any other reason Yes Mr A owns a house property in Mysore, and he had serviced a home loan for acquiring it. He is paying interest on that loan.
Due to his work, he resides in a rented accommodation in Bangalore and receives HRA from his employer.
Therefore, Mr A can claim a deduction of such interest as per section 24(b) and an exemption of HRA as per 10(13A) of the Act.
When the taxpayer owns a house property in respect of which he has serviced a home loan but resides in a  rented house in the same city owing to work, schooling needs of children or any other reasonable and justifiable reason Yes
Note: The distance between his own house and his workplace should be at least 35 Km		 Mr A owns a house property in South Delhi, and he had serviced a home loan for acquiring it.
Due to his work, he resides in a rented accommodation in the Northern part of Delhi and receives HRA from his employer.
Therefore, Mr A can claim a deduction of such interest as per section 24(b) and an exemption of HRA as per 10(13A) of the Act.
When the taxpayer’s house is under construction and is living on rent elsewhere Yes.
However, the taxpayer can claim the interest deduction of such under-construction property over the next five years in equal instalments commencing from the year in which construction is completed.		  
When you are renting your own house and living on rent elsewhere Yes.
Note:
  1. You will have to show rental receipts from your own house in such a case while calculating the tax liability.
 Mr A owns property in Bangalore, which he rents out to a tenant. He lives on rent in different accommodation. He is eligible to claim HRA exemption for rent paid and deduction of interest on the home loan.

Conclusion

To summarise the answer to the age-old query of salaried employees receiving HRA as a part of their salary and paying interest on home loans availed by them, they can avail both HRA exemption and interest deduction benefits provided under the Act.
However, a person who is not receiving HRA as a part of his salary and lives in a rented house may claim a similar benefit under section 80GG regarding the rental payments. However, the taxpayer should not claim HRA exemption under section 10(13A) in such cases.
The taxpayer is required to fulfil the following conditions for availing the benefit of section 80GG:

  • i) Taxpayer must be an individual or HUF.
  • ii) Individuals who are either salaried employees (not receiving HRA) or self-employed can claim the benefit under this section.
  • iii) The taxpayer/his spouse/minor child/ HUF does not have any residential property in their possession at a place where he resides/ performs duties related to office or employment/carries on business or profession
  • iv) The taxpayer does not have self-occupied property at any place.
  • iv) The taxpayer will need to file a declaration in Form No. 10BA that he/his spouse/minor child/ HUF do not have any residential property in their possession at any place mentioned above and also that he does not own such property at any other location.
  • v) The maximum amount of deduction available shall be the lowest of the following amounts:

- INR 5,000 per month
- 25% of adjusted total income (ATI)
- Actual rent - 10% of ATI

Here, ATI means:

Total income of the taxpayer;
Add: Deduction under section 80GG, only if subtracted before
Less: Long-term capital gain
Short-term capital gain under section 111A
Income under section 115A/115D
Deductions under sections 80C to 80U