English Edition | 06 July, 2022, 06:02 PM IST | Print Edition

How to claim both HRA and home loan tax benefit

together
Synopsis
Salaried people have very limited tax saving options and if they can get tax deductions
on account of HRA and home loan repayment together then it results in significant tax
saving.

Getty Images
While many employees claim income
tax deduction either on HRA or on
home loan repayment, there are few
who claim both these deductions
together. For a salaried person, who has
very limited tax saving avenues, the tax
deduction benefits available through
HRA and home loan repayment
become critical as it helps in saving a
significant amount of tax. If you are eligible to claim these deductions
simultaneously but if you are not utilising it fully, then you are losing your
hard-earned money which you could have easily saved. Here are three ways
you can claim HRA and home loan tax deductions together.

Scenario 1: Owned house in one city but living on rent in a different city

An increasing number of people now own houses in one city but live on rent in
a different city. Can such a person claim income tax benefit for both HRA and
home loan repayment? "Yes, if you are living on rent in your city of job and
own house in another city then income tax benefit can be claimed on HRA as
well as Home loan interest," says Sudhir Kaushik, Co-Founder & CEO,
TaxSpanner.Com.

This is the simplest way of claiming both HRA and home loan deductions
together. First you must comply with the conditions related to HRA for which
you must be an employed person and get HRA as part of salary. "As per Section
10(13A) of the Income-tax Act, 1961 (‘Income-tax Act’), exemption from House
Rent Allowance (HRA) is available if the twin conditions are fulfilled, i.e.,
expenditure actually incurred for payment of rent for residential
accommodation and such residential accommodation is occupied by the
individual," says Sonu Iyer, Tax partner & people advisory services leader, EY
India.

Moreover, you should also comply with the conditions related to home loan
deductions. As per Section 23(2) of the Income-tax Act read with Section 24(b),
interest on housing loan may be claimed as deduction for self-occupied house
property up to Rs 2 lakh per financial year. “Such deduction is available only if
the house property is occupied by individual or cannot actually be occupied by
the individual owner by reason of the fact that owing to his employment,
business or profession carried on at any other place, he has to reside at that
‘other place’ in a building not belonging to him. In other words, it is vacant due
to individual’s employment at another place," explains Iyer.

Though the owned property might be vacant or occupied by other family

members you can still treat it is as a self-occupied house. "The law permits an
individual to claim deduction for interest on housing loan for a property
which cannot be occupied by the individual due to his employment, business
or profession carried on at any other place," says Iyer.

So, if you are living in a different city due to occupation or employment you are
eligible to claim both the deductions simultaneously. "In the above example,
as the individual cannot occupy his own property due to his employment in a
different city, he may claim deduction for both HRA (for rented property) and
interest on housing loan for self-occupied property," says Iyer. You can also
claim up to Rs 1.5 lakh toward principal repayment of home loan on a self-
occupied property.

Scenario 2: Owning a house but living on rent in same city

Cities have become bigger, and for many it may take several hours for a one-
way commute to the workplace. Many people prefer to move their
accommodation closer to their workplace to reduce their commuting hours.
So can you claim both deductions while living in the same city.

“In special circumstances, if an assessee can prove that the owned property is
quite far from the place of work, and hence the rented accommodation has
been availed, then HRA tax exemption and home loan benefits both can be
availed,” says Deepak Jain, Chief Executive, TaxManager.in, a tax efiling and
compliance management portal.

You can only claim HRA if it is part of your salary. "For claiming benefit of HRA
under Section 10(13A), the person should not own such property and rent is
actually paid by the person," says Dr. Suresh Surana, Founder, RSM India.

Though the owned property may still be considered a self-acquired property

making you eligible to claim deduction on both principal and interest
repayment of a home loan. “Section 23(2) of the IT Act lists down the
circumstances under which property can be considered as SOPs (Self
Occupied Property) by an assessee. The conditions are: Where the property
consists of a house or part of a house which— (a)is in the occupation of the
owner for the purposes of his own residence; or (b)cannot actually be occupied
by the owner by reason of the fact that owing to his employment, business or
profession carried on at any other place, he has to reside at that other place in
a building not belonging to him. Further, the property should not actually be
let out at any time during the year," says Surana, Founder, RSM India.

However, other reasons for living in the same city may not help in claiming
the owned property as self-occupied and getting HRA tax deduction. "The
provisions do not explicitly provide explanation / clarification / comment on
definition of “other place” with regards to the vicinity/area/city/state of the
property to be situated. Further, on plain reading of the regulations, it can be
understood that they do not extend the benefit of considering a property as
SOP in case the person cannot actually reside in a property owned by himself
due to proximity of children’s school," says Surana.

So, if the reason is related to place of employment, claiming both deductions

together will not be difficult. "As per the Income-tax Act, an individual may
claim deduction for interest on housing loan for a property which cannot be
occupied by the individual due to his employment, business or profession
carried on at any other place," says Iyer. "However, such an individual should
be careful and maintain substantive evidence to prove that he has to reside at
the any other place due to his employment," adds Iyer.

Scenario 3: If one lets out his owned house and lives in the same city on
rent
Except for proximity to workplace, there could be many other compelling
reasons for a person not to live in his owned house but in a rented
accommodation. “These reasons can be like the owned house is too small for
the family or children’s school is near the rented accommodation,” says Jain.
Can one claim both deductions in such a case?

Yes, but it is not possible with a self-occupied house as this can happen only
when you give your property on rent. “If a person lets out his own property and
lives in the same city or any other city for any reason including proximity to
the children’s school or job location etc., the person shall be eligible to claim
benefits of HRA as well as Home loan repayment,” says Surana. However, in
case of let out property only deduction on interest payment is available.

If you have genuine reasons, there is no bar on claiming both deductions

together. “For an assessee who lets out his owned house and due to bona fide
reasons lives in the same city on rent, one can claim tax benefit for home loan
repayment on the owned property which is let out and also can claim the HRA
on the property in which he resides.” Says Jain.

However, the reason for living on rent in the same city should be convincing.
"The genuine need to give your house on rent and living on rent might need to
justify the income tax department. There is chance of disallowance because no
prescribed rules given in act," says Kaushik.

Though you may have to forgo the principal repayment related deduction, but
you would be able to get a maximum deduction of Rs 2 lakh on interest
payment of your home loan. For many people it may work out well as they may
not need principal repayment benefit at all because it may be exhausted
through other avenues like EPF contribution, NPS contribution, children’s
education fee, life insurance and investments like ELSS, PPF, ELSS, NSC and so
on. If your annual interest payment is much higher than Rs 2 lakh then there
are changes that your net loss from income from house property is above Rs 2
lakh giving you full deduction benefit despite rental income.

RATE THIS STORY

(Your legal guide on estate planning, inheritance, will and more.) ...more