The income tax year end is nearing. All individuals are busy planning how to minimize their taxes. One important component used by many salaried people is HRA and home loan deductions under section 80C,section 24.
I have started getting many emails in this regard and hence thought will answer through a post than reply individually though I remember to have written a general post last year. I have also been lazy and not written much due to my regular job commitments
I have listed out the possible scenarios one comes across when availing HRA exemption and home loan deductions under section 80C, section 24.
Every body plans to buy a home due to ever increasing realty prices and the Indian dream of owning his own home. But many do not properly avail or use income tax benefits or are a bit confused about it.
The Income Tax Act has clearly laid out the guidelines. If in doubt, consult a Chartered accountant for a small fee.
HRA, Home Loan deductions under section 80C, section24
Now that we have started, let us see the various scenarios usually faced by our readers. These have been taken from emails received but names have been changed. One should remember that to avail interest deduction under section 24 below 3 conditions must be satisfied.
- Loan must be availed after 1st April,1999.
- The possession is taken within 3 years from end of financial year in which loan was taken.
- Interest certificate is available from the lender.
Scenario 1: Rajesh owns house in HBR Layout, Bangalore which he has rented out for Rs 12,000 and he is paying home loan EMI. He is residing in a rented house for Rs 10,000 in Hebbal.
Assuming Rajesh is paying the EMI on the home loan regularly, the Income Tax Act has a provision to let you claim both HRA exemption and avail home loan benefits.
The Income Tax Act accounts HRA and home loan deductions under separate sections independently. The two benefits are not related to one another.
HRA exemption benefits is usually availed under section 10(13A) Rule 2A . Whereas home loans principal repayment tax benefits are availed under section 80C (tax benefit on principal repayment) .
The interest component of home loan is availed under Section 24 (tax benefit on interest payment) of the Income Tax Act. So you should use both or rather 3 sections to claim your benefits and deductions.
Scenario 2 : Asha owns an apartment in Egmore, Chennai but works and rents a house near Mahindra City in suburban Chennai.
Asha had purchased her 2BHK apartment in Egmore. She took a home loan and is regular on her EMI payments. As many have it, the place where you own a house and your office or kid’s school are very far. It becomes a hassle to travel to and fro each day to office.
So typically, they rent a house near office and school.
In such cases, though you own a home in same city, the Income Tax Act allows you to claim HRA exemption and home loan benefits under section 80C and Section 24 for both principal and interest repayments of the home loan.
Scenario 3: Prakash owns an individual house in Chitoor which cost him Rs 50 lakhs. He bought this house with a HDFC home loan for Rs. 40 lakhs. This year his interest is Rs 4.2 lakhs approximate and principal repaid is Rs 78,000. He lives in the same house.
In this case, Prakash can make use both section 80C and section 24. He cannot claim HRA exemption as he lives in his own house.
So Prakash can claim Rs 2 lakh deduction for interest paid under section 24 and under section 80C he can claim Rs 78,000 which is principal repaid.
Scenario 4: Ram owns a house in Chennai. He pays EMI of Rs 25,000 for his Chennai house but works in Hyderabad where he has rented a house for Rs 10,000.
In Ram’s case, please note that he lives in a different city. Hence, he is entitled to both HRA and home loan benefits.
So in this case again, assuming it is the least option, he can claim his full HRA exemption. In addition to that, he can claim home loan benefits under both section 24 and 80C.
Scenario 5: Joseph bought an apartment in Kolkata a year back but it is under construction. His EMI is Rs 30,000 of which Rs 24,000 is interest and Rs 6,000 is principal. So he also rents an apartment and pays rent Rs 10,000 for it.
In Joseph’s case, the house is not fit for occupying. He can claim deduction for his principal amount (Rs 6,000 *12) under section 80C.( Just for easy calculation purpose. usually principal component increases with each month EMI for reducing balance loans).
He can also claim his HRA exemption fo Rs 10,000.However, he cannot claim interest deduction under section 24.
The interest can be claimed only after house is occupied. The total interest paid in all preceding years before occupation can be equally split as five installments. Assume he paid Rs 4 lakhs interest in 2 years. So he can claim Rs 4 lakhs for the next 5 years ie., Rs 80,000 each year.
Scenario 6: Anil earns a basic salary of Rs 50,000 per month. Also, he rents an apartment in Delhi for Rs 25,000 per month. Now Anil is eligible for 50% of his basic pay as HRA exemption because Delhi is a metro. The actual HRA as per his salary slip is Rs 30,000.
Then his actual HRA exemption claim can be the least of the following
1) Actual HRA allowance from the employer, i.e. Rs 30,000.
2) 50% of Anil’s basic salary as he resides in Delhi ie.,a metro (else outide metro it is 40%), i.e. Rs 25,000.
3) The actual rent he pays for the house from which 10% of his basic pay is deducted, i.e. Rs 25,000 – Rs 5,000 = Rs 20,000
The value considered for his actual HRA exemption will be the least value of the above figures.
Scenario 7: I paid Rs 1,00,000 as stamp duty, registration charges in FY 2014-15 when buying home. Can I claim deduction in FY 2015-16.
NO. The stamp duty and registration charges have to be claimed under section 80C in the financial year of making the purchase. They cannot be carried forward. Note that this is also inclusive of principal repayment and the total limit is Rs 1.5 lakh for that year.
Scenario 8: Ismail buys a house in Goa for Rs 40,00,000 in January 2014. He sells the house in January 2018. He has paid Rs 8 lakhs as principal in these total 4 years and claimed under section 80C.
Section 80C clearly states when property is transferred before 5 years expiry from the financial year end in which property was taken possession, then deductions & benefits will be reversed.
So when he sells before end of 5 years from year of possession, the deductions availed are added as income in that financial year of sale., ie., in FY 2017-18 his taxable income will rise by Rs 8 lakhs as deductions will be reversed. So plan your house sale accordingly
Section 24, Section 80C – Points to remember:
- Please note that the maximum claim under 80C section is Rs 1.5 lakhs inclusive of tuition fee,insurance,PPF, ELSS, NSC etc.,
- Rs 2,00,000 is maximum under section 24 for self occupied house from AY 2015-16. There is no limit on interest deduction for let out or deemed to be let out property. For eg., You live pay an interest of Rs 4,00,000 this year and live in that same house. Then under section 24 your maximum limit for deduction is Rs 2,00,000 only though you pay Rs 4 lakhs. But assume you rented that house for which you pay EMI, then you can claim the full Rs 4,00,000 under section 24.
- Houses under construction are not eligible for deduction under section 24. However principal repaid is eligible for deduction under section 80C.
- If you buy a house and it is not completed in 3 years, Then in that case the maximum deduction is only Rs 30,000 per year for self occupied houses. Assume you buy home in June 2015. It is completed in Jan 2019, then interest maximum exempted is Rs 30,000 only per year. However, there is no limit of this 30,000 deduction if house is let out.
- When availing pre-completion interest deduction as in scenario 5, remember that if it is self occupied property then the Rs 2,00,000 maximum limit is inclusive of Rs80,000+interest paid for that year. For let out, the interest deduction claimed can be above Rs 2,00,000.
- Processing fee can be claimed as deduction under section24 in year of purchase. Typically processing fee of home loan is 1% of loan amount ie., for Rs 30 lakh loan processing fee will be Rs 30,000 and can be claimed under section24 deduction.This also applies for houses purchased before 1st April,1999.
- Section 24 is on accrual basis and section 80C is on payment basis. That is, even if interest is not actually paid it can be claimed in a financial year under section 24 but for section80C the actual principal must have been repaid for claiming deduction.
Remember that buying a home is prudent decision but availing tax benefits is even more important to grow wealth faster.
You can also deduct 30% of your Net Rentals if house is let out under Section24 and use section 80EE to benefit Rs 1,00,000 if you’re a budget first time home buyer. But that is for a separate post.
The government has made available these deductions under section section 24 and section 80C to encourage buying homes.
I think I have tried to cover all possible scenarios that came to the mind regarding renting houses, HRAs, home loans tax deductions under section 24 and section 80C.
Make prudent use of these deductions and plan your income tax accordingly. Let me know if it was useful and share with your friends on Facebook,Twitter so that they benefit.