Buying a house is probably one of the single biggest investments one makes in a lifetime. In today's complex financial market, buying a property requires a thorough knowledge of real estate. Also it is difficult to choose an appropriate loan given the intense competition in the home loan market.

Today, a 30-year-old professional can put down a deposit of 10 per cent of the cost of a house and easily raise a 15-year mortgage loan.

The home loan market in India is also growing at a rate of over 40 per cent over the last four years. The most important factor that has contributed to the growth is declining interest rates.

Here we can highlight two-way benefits on HRA (house rent allowance) along with home loans.

What is HRA?

It is an allowance given by an employer to an employee. The sole purpose of which is to meet the cost of renting a home.

Here, we hope to clear the concepts of HRA:

Please note, when we refer to salary in this article, it encompasses basic component and the dearness allowance.

You can claim HRA if you fulfil these three conditions:

HRA allowance as part of your salary package.

Staying in a rented accommodation and paying rent for it.

The rent exceeds 10 per cent of one's salary.

You can claim rent given to parents:

Let's say you live with parents and pay them rent. This makes your parents the landlords. One of them will have to declare it in his/ her personal income tax return to prevent litigation in the future.

One cannot claim rent paid to spouse:

The relationship between a husband and wife is not commercial in nature; a husband and wife are supposed to stay together. So the income tax authorities will not accept payment of rent to a spouse.

One will need to keep all rent receipts:

Since it is the only proof that you are paying rent. HRA exemptions are only available on submission of rent receipts or the rent agreement.

However, if the HRA is up to Rs 3,000 per month, then receipts/ agreement is not mandatory. It is only when your HRA exceeds this amount that you will have to keep the receipts.

But it is wise to still keep them because, "at the time of assessment, the income-tax officer may demand the receipts/ agreement."

The actual HRA you will be entitled to get exemption for will be the least of the following:

The actual amount of HRA received.

40 per cent of salary. This increases to 50 per cent if you are renting out the house in Delhi, Mumbai, Chennai or Kolkata.

Rent paid minus 10 per cent of salary (basic component + dearness allowance).

The HRA that does not get exempted is taxed:

Let's see how it works with an example (TABLE I).

Table I

ASSUMPTIONS
HRA per month	Rs 15,000
Basic monthly salary	Rs 30,000
Dearness Allowance	Nil
Monthly rent	Rs 12,000

TABLE II: Rs 9,000 being the least of the three amounts will be the exemption from HRA. The balance HRA of Rs 6,000 (15,000-Rs 9,000) is taxable.

RENTAL ACCOMMODATION IN MUMBAI
Actual amount of HRA	Rs 15,000
50% of salary	50% x (30,000 + 0) = Rs 15,000
Actual rent paid - 10% of salary	Rs 12,000 - [10% of (30,000 + 0)] = 12,000 - 3,000 = Rs 9,000

If you took a home loan for a home in one city but reside in another you will be entitled to:

• Tax benefit on Principal repayment under Section 80C
• Tax benefit on Interest payment under Section 24
• HRA benefit 10(13 A)

Or, even if the home is in the same city but is not ready forcing you to rent a place, you will still be entitled to all the above benefits.

Of course, you can claim tax benefits on the home loan only if your home is ready to live in during that financial year. Once the construction on your home is complete, the HRA benefit stops.

If you took a home loan, got possession of the house, have rented it out and stay in a rented accommodation, you will be entitled to all the three benefits mentioned above.

However, in this case, the rent you receive would be considered as your taxable income.

Let's say you took a home loan and have bought a home but are not residing in it:

It could be that the home is at a considerable distance from your work place. Or, it could be that the home is rather small and your parents are living in it so you have to stay elsewhere.

Though your rental accommodation and home are in the same city, you can still get all the benefits.

• Tax benefit on principal repayment under Section 80C as deduction of income
• Tax benefit on interest payment under Section 24. Under the head of house property
• HRA benefit under the head of salaries

However, it is necessary you have some of your belongings at your home (the one you own) and you stay there on and off on during weekends and holidays.

Despite this, if your employer does not agree and denies your tax benefits, you will have to claim it at the time of filing your tax returns.

Renting a house, on the other hand, is acceptable for the sake of convenience and financial constraints.

There are a few tax shelters available for rental payouts both for salaried employees by way of HRA deductions and for self-employed professionals under section 80GG.

However, the applicability is limited and there are some preconditions attached to it.

Thankfully, banks and housing finance companies are more than happy to finance our dreams -- no matter whether we are of any status or just another common man.

The writer is head, financial planning, Sykes & Ray Equities.