A win-win way of claiming tax exemptions

A very frequently asked question, and justifiably so, is: can I get exemption on HRA (house rent allowance) as well as deduction on the interest amount paid on home loan?

It's a common practice these days for most of us to either relocate for jobs to other cities with an intention to come back to the home city at a future date.

Even if we live in the same city where we work, travelling distances can be quite daunting. Imagine travelling to work in Colaba from Virar everyday.

Some of us continue to live on rent in the same city as our workplace because the rented premise is more convenient even though we have our own home in the same city. But what if you want to claim tax benefits on your home, as well as, claim exemption on your rented house? Is it possible? How?

Click NEXT to read how you can claim tax benefit on your home loan and claim exemption on your rented house.

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The simplest answer is yes. It is possible to claim both simultaneously.

What is popularly not known is that claiming deduction for interest payable on your home loan and claiming exemption for HRA in respect of rent paid for the rented property is completely de-linked. There is no restriction under the Income Tax Act with respect to claims for both.

The exemption of HRA is covered under Section 10 (13A). Simply speaking, the only conditions for allowing HRA exemption are:

Rent must actually be paid by the assessee (legal term for the person whose tax liability is being worked out) for the rented premises which s/he occupies, and the rented premises must not be owned by her/him.

As long as the rented premises are not owned by the assessee, the exemption of HRA will be available up to the limits specified in the relevant rules. There is no mention here about any effect on the exemption because of ownership of any other property.

Let us now turn to the deduction of interest payable on home loans. The interest is not a straight deduction allowed from the salary income. The deduction is actually allowed while calculating the income from house property; although the effect (as we will see below), in the case of self-occupied property, is the same as allowing it as direct deduction from salary income.

The relevant sections are Section 22 to Section 27. Putting it simply, the calculation of income from house property is done as under:

Rental income (net of municipal taxes) = Annual Value (A)

Less 30 per cent of A as standard deduction (S)

Less interest payable on any loan taken for acquisition or construction of this property (I)

So the income from house property (H) = A-S-I

The point that we must remember is that income can also be negative or in other words, include a calculation of loss.

In the case of self-occupied property, the annual value 'A' is taken as 'nil' (therefore 'S' automatically becomes nil as 30 per cent of 0 is 0) and 'I' is restricted to a maximum of Rs 1,50,000.

Therefore, in the case of self occupied property the result of calculation of 'income from house property or 'H' will always be a loss to the extent of the interest payable on the home loan or Rs 1,50,000 (whichever is lower).

Where the owned property is given on rent, the annual value will be calculated based on the rental and the final income (or loss) from house property will be calculated as given above. Please note that in such a case, there is no restriction on the maximum amount of deduction available in respect of 'I'.

Where the owned property is lying vacant and is neither rented out nor self-occupied, the rental that could have been derived (had it been rented out) has to be taken as the rental income in respect of such property and the calculation has to be done as in point 3 above.

Of course, the calculation of such a notional value has several practical difficulties. If similar property in the neighbourhood has been given out on rent, which can serve as a good basis to calculate this figure. There are also a large number of case laws which have gone into the method of calculation of such notional value. You may need expert taxation advice to calculate this figure.

'Income from house property' is either taxed (if it is positive) or if it is a loss, it is allowed to be set off against the income from other heads including salary (and hence the popular misconception that interest on home loans is allowed as a deduction from salary income as the impact, in the case of self-occupied properties, is the same as a direct deduction of the interest from salary income).

There is nothing in the section that affects the exemption of HRA at all. Also, there are no conditions that restrict the availability of deduction of interest based on the assessee's stay in any other premises in any city (whether the same city as the rented property or another city).

The principal amount repaid on all loans taken from specified entities such as banks/employer companies, to acquire/construct residential house property(ies) is allowed as a deduction under Section 80C up to the overall limit of Rs 1,00,000 mentioned in that section. This is not at all affected by the exemption of HRA in any manner.

So this way we see that claiming HRA is completely de-linked, so go for it!

Note: The proposed Direct Taxes Code if actually implemented will make this issue completely irrelevant as it neither allows exemption for HRA nor a deduction for interest payable on a loan taken to acquire a self occupied property.