Taxpayers who own a home but live in rented accommodation can claim both House Rent Allowance (HRA) and home loan tax benefits. This dual advantage is available only under the old income tax regime. Understanding the specific rules under the Income Tax Act allows individuals to optimize their tax planning effectively.
Many Indian taxpayers who have purchased a new home but continue to live in a rented property may not realize they can often claim tax benefits for both situations. Under current tax laws, it is possible to receive the benefit of House Rent Allowance (HRA) while simultaneously claiming deductions on a home loan, provided the individual chooses to file their taxes under the old tax regime.
Understanding the Dual Tax Advantage
To be eligible for HRA benefits, a taxpayer must receive an HRA component as part of their salary, pay actual rent for a property they do not own, and reside in that rented house. At the same time, the Income Tax Act allows homeowners to claim deductions on their home loan interest under Section 24(b) and principal repayments under Section 80C.
For a home loan, tax benefits generally begin from the financial year in which the borrower receives possession of the property. This structure is designed to support individuals who have invested in property but need to live elsewhere due to work, family, or personal reasons. It is important to note that these deductions are not automatic and require the taxpayer to submit valid rent receipts and home loan interest certificates to their employer or when filing returns.
Old Regime vs New Regime
The choice of tax regime is the most critical factor for this specific benefit. The old tax regime is structured to encourage investments and borrowing by allowing various deductions, including HRA and home loan interest. In contrast, the new tax regime, which was introduced as a default option with lower tax rates, eliminates most of these deductions.
Under the old tax regime, if the interest paid on a home loan exceeds the rental income earned from the property, it creates a loss from house property. Taxpayers can set off this loss against other income sources up to a limit of ₹2 lakh per year. If the loss exceeds this amount in a given year, the remaining balance can be carried forward for up to eight years to be set off against future income. Furthermore, homeowners can claim one-fifth of the pre-construction interest paid before the year of possession, spread over five years. Because these provisions are not available under the new tax regime, individuals should carefully compare their total tax liability under both systems before making a final decision during the tax-filing season.