Is the benefit of deduction available on HRA and Home loan ?

There is a difference and a thin line between tax planning and tax evasion. Some individuals cross that line and end up on the wrong side of law. One such instance is taxpayers claiming deduction onHouse rent allowance (HRA) as well as interest paid on home loan while living in their own house.

Claiming deduction on both HRA and home loan principal/interest payments is not prohibited per se, as there are situations where you may be living in a rented accommodation despite owning a house. But some people claim both while living in their own house. This is how they do it. The house where they live is in the name of their wife or parents. So, they show that they are paying ‘rent’ to wife/parents and claim full HRA deduction.

In the worst case, they live in own house and still claim (partial) HRA deduction and full deduction on home loan interest and principal payments. They can get away with this as there is no need to furnish permanent account number, or PAN, of the landlord if the rent paid is less than Rs 1 lakh a year.
This, however, may come back to haunt them if the case comes under the scrutiny of the Income tax department.
House Rent allowance (HRA) is one of the components of salary package, which is normally offered to employees by their employers to meet the higher cost of renting a home. Tax exemption under Income Tax Act for HRA is allowed to salaried persons who are occupying a rented accommodation. It is being regulated by 2A of Income Tax Rules, 1962 and section 10(13A) of the Income Tax Act, 1961. Accordingly, least of the following three options will be exempt from tax

• [a.) 50% of the basic salary and DA, where the residential house is situated at Mumbai, Kolkata, Delhi or Chennai and an amount equal to 40% of above salary where residential house is situated in any other place.
• [b.] HRA actually received by the employee in respect of the perziod during which rented accommodation is occupied by the employee during the financial year

• [c.] the excess of rent paid over 10% of the salary.

Some times, salaried persons who avail home loan for acquisition or construction of residential house properties but could not stay in such properties owing to employment or other reasons and they stay in rented houses. In such circumstance, when they are receiving a HRA – allowance from their employer, a question often arises

whether they can get exemption of HRA under section 10(13A) of the Act?, based on the rent actually paid by them as well as the interest payable on the housing loan taken by them towards acquisition or construction of a property ?

To avail HRA benefit,
• salaried employee who is in receipt of HRA from his employer
• should be actually paying house rent for the rented premises which he has occupied
• And such rented premises must not owned by him.

It is evident from the above section the exemption of HRA is available to an assessee so long as he occupies the rented premises which is not owned by him. At the same time, the assessee is not barred from claiming exemption under section 10(13A) read with rule 2A, because he be the owner of any other house property, which was acquired through housing loan. It is to be noted that provisions of deduction of interest on borrowed capital for the acquisition or construction of house property and exemption of house rent allowance are two different issues under the Act, as one would not influence other. The benefits accrue on account of availing home loan are interest payments which is exempted under section 24(b) and the principal repayment is exempted under section 80C of the Income Tax Act. Conversely, HRA benefit can also be availed by the assessee on fulfillment of certain circumstances depicted above.

Let us discuss situations where you can lawfully claim both deductions and tell you about those where you are pushing your luck a little too far.

You own a house but you live in a rented apartment:
Your workplace is far from your house. The commute to office is a big hassle given the traffic snarls. So, you take an apartment on rent near your office, and let out your own house. This is a common practice in metro cities such as Delhi-NCR, where many people own a house in Noida or Ghaziabad but have to commute daily to their office in Gurgaon.

You have a house in one city but stay in a rented house in another. In such cases, you can claim deduction on HRA as well as home loan interest and principal payments. “The probable criteria for testing the correctness of the HRA claim and interest deduction by the tax office will be to substantiate that the place of employment and location of the property are different,”

You stay in a house owned by your parents or spouse:
You own a house but live in a house owned by your parents or spouse. You show that you pay rent to your parents/spouse and, hence, claim both HRA and home loan payment deductions. By doing this way, you may not be doing anything illegal. The law does not prohibit this provided the full cycle of the transaction has been completed. This means that if you have paid rent to your spouse/parents, they should add it to their incomes and disclosed in tax returns. If your case comes up for scrutiny and you fail to furnish the proof of the transaction, you may be in for trouble.

Paying rent to your wife or parents for claiming both HRA and Section 24 deduction
This option may not be construed well within the boundaries of law. If your tax return is picked up for scrutiny, such a transaction can be questioned,” With digitisation of details of income tax assesses and online filing of returns, the authorities now have easy-to-use tracking tools. These enhance the chances of such an anomaly getting caught. Tax authorities, are keeping a close eye on transactions among relatives, especially between spouses. “Paying rent to the spouse may not be safe as the tax department may be keeping an eye on such transactions. If the case goes to the tax department, it will be difficult to explain the transaction,”

Living in a self-owned house:
You are staying in the same house for which you have taken a home loan and yet are claiming HRA deduction. The rule says that if you are claiming HRA deduction of more than Rs 1 lakh a year, you have to furnish the PAN of the property owner. So, you claim HRA deduction on rent less than Rs 1 lakh and also claim deduction on home loan interest and principal payments. Many get away with these adjustments. But if your return is scrutinized for any reason, you may be asked to provide an explanation for all transactions and deductions. You could land into trouble.

If you have two properties, one occupied by self and the other let out
you can claim deduction on interest paid for loans taken to buy both the houses. If the house is self-occupied, the maximum deduction on interest paid is Rs 2 lakhs. However, if the house is let out, the full interest payment can be claimed as a deduction.