Most of the employees in India either buy apartments or build their own house with a home loan during their employment. Home loans have two components, interest and principal amount which are allowed as income tax deduction up to an extent as provided in the IT act.
HRA forms part of your taxable salary which your employer gives you to take care of your living expenses at your city of employment. This depends on your company’s policy. Your employer can define it based on your city of living or else your employer can give you liberty to choose a component out if your variance allowances as agreed before joining the employment.
If HRA is part of your salary then you will receive it after tax deduction. Such deduction of income tax depends on the city of living and the amount you receive as HRA. If you are living in a metro city then you will be eligible for a higher tax deduction compare to your eligibility to a non metro city.
Now the question is, can an employee claim income tax benefits for both HRA and home loan. To claim HRA exemption you need to satisfy two conditions;
- You should have occupied the house and
- Paying rent
So to claim HRA exemption one need to pay rent for a house which is not owned by him. Interest on home loan, principal payments on home loan and HRA exemption are claimed through different sections of IT act. One can claim both exemption if he is eligible to do that as per IT act.
House in the same city
If you are living in a city where you own a house and for some reason you are unable to live there then you can claim HRA exemption for your rent payment in addition to the tax deductions for the interest and principal amount on home loan. However if you are living in the same house which is owned by you then HRA exemption will not be available to you as under IT act one of the conditions to claim HRA exemption is “you should pay rent.”
If the house is under construction and because of such construction employee is unable to live their then he will be eligible for HRA exemption if he has taken another house on rent. During the construction phase, employee cannot claim income tax benefits on interest on home loan but he can claim income tax deductions under section 80C for the principal portion on home loan.
House in Different city
If you as an employee owned a house in a different city other tan the city of your employment then HRA exemption will be available as you do not have a house/apartment in the city of employment. In addition to the HRA benefits tax deductions for Interest on home loan and principal payment is also allowed. However rent received from such other house will be taxable in the hands of employee under the head income from house property.
So owning a house in the same city or in any other city has no relevance in claiming HRA exemption. The only exception to this rule is to claim HRA exemption, one should not have paid rent for his owned house.