Basic Tax Fundas

Tax treatments for house rent and home loan* *"*

*Sanjay, currently employed with a private company, is staying in a rented
apartment in Mumbai and has bought himself a property in Calcutta for which
he has taken a home loan. He finds himself in a dilemma while filing the
tax returns -- " Can I claim both HRA and home loan benefits?" This seems to
be a confusing point for most taxpayers.*

*When Sanjay pays rent, he is definitely allowed to claim exemption on both
the house rent allowance ( HRA) and the home loan under the income tax act.
Let us evaluate various possible situations individuals can find themselves
in and understand what the income tax act permits them to do.*


*Situation 1: You live in your own house. You have taken a home loan and
residing in the house purchased with it. Since you are residing in your own
house, you will not be able to claim HRA. However, you will be able to
claim tax benefits on both the principal and interest repaid on the loan.*

*Situation 2: You own a house in another city. This is the situation faced
by Sanjay. He resides in Mumbai but has bought an apartment in Calcutta
with a home loan. Sanjay will be entitled to HRA exemption and tax benefits
on both the principal and the interest repaid.*

*Situation 3: Your house cannot be occupied at this point. You have bought
a house in Mumbai with a home loan but you're currently living in the same
city in a rented apartment because the house is under construction.*

*In such a case, you are eligible to claim HRA. In the case of tax breaks
on the home loan, you can claim benefits only on the principal component
before the completion of the house. Once the house is complete, you can
claim exemption on the total interest paid up to the date of completion in
five equal installments in five years, beginning from the year of
completion.*

*Situation 4: You have a house which is ready for occupation but you cannot
reside in it. You have bought a house in Delhi with a home loan. Though the
new house is complete, you continue to live in a rented apartment in the
same city as the house you have bought is far from your office.*

*In such cases, the income tax act permits the individual to claim HRA and
home loan benefits, which include both the principal and the interest
repaid on the home loan.*

*Also, note that if your house remains vacant, you will still need to pay
tax on a notional rent income.*

*Situation 5: You have rented your own house while you are residing in a
rented house. You took a home loan and your house is ready for occupation.
However, you have rented the same out while you are residing in a rented
house. The income tax act will allow you to claim both HRA and home loan
benefits. However, since you have also been receiving rent, income from the
latter will be taxable at your hands.*

*Now, that we have dealt with all the possible situations, let's take
Sanjay's situation as an example to help you figure out how to get the
benefits.*

*The income tax act treats HRA and home loan deductions under separate
sections independently. The two are not interconnected. HRA is dealt with
in Section 10( 13A) Rule 2A, while home loans are entitled for tax benefits
under Section 80C ( on the principal repayment) and Section 24 ( on the
interest payment) of the income tax act. Hence, feel free to avail yourself
both the exemptions.*

*Relief on home loan Suppose, Sanjay had purchased an apartment in Calcutta
for Rs 38 lakh three years back. He took a home loan of Rs 32 lakh to fund
the purchase.*

*So far, this year he has repaid an interest of Rs 3.3 lakh and a principal
amount of Rs 60,000.*

*Section 80C offers tax rebate on home loan up to Rs 1 lakh and Section 24
on interest up to Rs 1.5 lakh. So, Sanjay can utilise up to Rs 1.5 lakh on
the interest he has paid and get the tax benefit in full for the amount
paid towards the principal.*

*HRA calculation Sanjay earns a basic salary of Rs 40,000 per month and has
rented an apartment in Mumbai for Rs 20,000 per month ( he is eligible for
50 per cent of the basic pay for HRA exemption as he resides in a metro).
The actual HRA he receives is Rs 25,000.*

*The following values will be considered to find out his HRA tax exemption:
a. Actual HRA allowance from the employer, that is Rs 25,000 b. 50 per cent
of the basic salary as he resides in a metro ( else 40 per cent), that is
Rs 20,000, and c. The actual rent he pays for the house, from which 10 per
cent of his basic pay is deducted, that is Rs 20,000 - Rs 4,000 = Rs 16,000
His actual HRA exemption will be the least of the above figures. Hence, the
taxable HRA amount for Sanjay per month will be Rs 25,000- 16,000 (
available HRA deduction) = Rs 9,000.*


*Source : Bankbazaar*