HRA and Home loan interest claim: Can it be done together?

Home loans offer individuals an effective means to purchase their dream homes without a significant financial burden. With the flexibility of long repayment terms, affordable interest rates, and tax-saving benefits, home loans have become a key financial instrument for many. However, understanding the different components involved, such as interest deductions, HRA, and tax implications, is crucial to making informed decisions. By learning about eligibility criteria, rules for claiming both HRA and home loan interest deductions, and the impact on tax returns, borrowers can strategically maximize their benefits. Moreover, knowing which documents are needed for claims and understanding how to claim HRA for rented accommodations while owning a house with a home loan can further streamline the process. This comprehensive guide will delve into all these aspects, providing clear, actionable steps to help individuals navigate the intricacies of home loans and related tax benefits with ease.

Understanding HRA (House Rent Allowance)

Eligibility criteria

• Available to salaried individuals who receive HRA as part of their salary.

• The individual must be living in rented accommodation.

• The house owner should not be a direct relative, such as a spouse or a minor child.

Calculation of HRA deduction

• The lowest of the following is considered for HRA deduction:

1. 50% of salary for those living in metro cities, 40% for others.

1. Actual HRA received.

1. Rent paid minus 10% of salary (basic + DA).

Understanding home loan interest deduction

Eligibility criteria

• The loan must be taken for the purchase or construction of a residential property.

• Deduction is available for the person who has taken the loan.

• The construction must be completed within five years from the end of the financial year when the loan was taken.

Calculation of home loan interest deduction

• Deduction under Section 24(b) of the Income Tax Act.

1. Interest up to ₹2,00,000 annually is deductible for self-occupied homes.

1. No upper limit for let-out property.

1. Interest paid during the pre-construction period can be claimed in five equal installments.

Claiming both HRA and home loan interest simultaneously

Rules and regulations

• Both HRA and home loan interest deductions can be claimed if you meet the criteria for each.

• The house for which the loan is taken should not be the same as the one rented.

Conditions for claiming both deductions

• If the home loan property is under construction, HRA can be claimed for rented accommodation.

• If your own house is far from your workplace, you can claim HRA for rent near the workplace while availing home loan deductions for the owned property.

• HRA deduction can be claimed even if you own another property, provided the conditions of rental accommodation are met.

Impact on tax returns

How to maximise your tax benefits?

• Ensure accurate documentation of rent receipts and home loan interest statements.

• Avail the full deduction under Section 80C and Section 24(b).

• Consider joint home loans for higher deductions.

Common pitfalls to avoid

• Failing to retain rent receipts or proper rental agreements.

• Confusing HRA with the home loan interest deduction eligibility.

• Not claiming the pre-construction interest in installments.

Documents needed for HRA and home loan interest claims

• Rent receipts for the entire year.

• Rental agreement with the landlord’s details.

• Home loan statement from the financial institution.

• Proof of completion or possession of the property

Claiming HRA for rented accommodation and home loan interest for own house

• Rent agreement and receipts are necessary for HRA claims.

• Own house property documents and loan statements are required for home loan interest deduction.

• Both claims must pertain to different properties to be valid.

Certain cases where you cannot claim HRA exemption or deduction on home loan interest

In specific scenarios, individuals are not eligible to claim HRA exemption or deductions on home loan interest. Below is a comprehensive table highlighting these cases for better understanding.

Scenario	Reason
Living in own house (self-occupied property)	If you live in the property for which you have taken the home loan, HRA cannot be claimed, as no rent is paid. You can still claim a deduction for home loan interest.
Property not completed within 5 years	If the construction of your house is not completed within 5 years from the end of the financial year when the loan was taken, the maximum home loan interest deduction is limited to ₹30,000 instead of ₹2,00,000.
No valid rent agreement	If you are claiming HRA but do not have a valid rent agreement with your landlord, HRA exemption cannot be claimed. You must provide proper documentation to avoid rejection.
Loan not for residential purposes	If the loan is taken for a commercial property or any non-residential purpose, no home loan interest deduction can be claimed under Section 24(b).
Rented house from a relative	If you are paying rent to a direct relative like a spouse or minor child, you cannot claim HRA exemption, even if rent receipts are produced.

For more detailed home loan details, refer to this link. Additionally, to explore if home loan interest rate can be fixed, click here for further information.

By keeping these scenarios in mind, you can ensure compliance with the guidelines and avoid any errors while filing for deductions.

Conclusion

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