How to apply for both the HRA and the tax benefit for a mortgage loan

While many employees claim an income tax deduction either on HRA or home loan repayment, few claim these two deductions together. For a salaried person, who has very limited tax saving opportunities, the tax deduction benefits available through HRA and home loan repayment become essential as they save a significant amount of tax. If you are entitled to claim these deductions simultaneously but do not use them fully, you are wasting your hard-earned money that you could have easily saved. Here are three ways to claim HRA and home loan tax deductions together.

Scenario 1:
Owning a house in one city but renting in another city

A growing number of people now own homes in one city but live in rentals in another city. Can such a person claim a tax benefit for the repayment of the HRA and the mortgage? “Yes, if you live on rent in your city of work and own a house in another city, the tax benefit can be claimed on HRA as well as home loan interest,” says Sudhir Kaushik, co- founder and CEO of TaxSpanner.Com.

This is the easiest way to claim both HRA deductions and home loan deductions. You must first comply with the conditions related to the HRA for which you must be a salaried person and obtain the HRA as part of the salary. “Pursuant to Section 10(13A) of the Income Tax Act 1961 (“Income Tax Act”), exemption from Housing Allowance (HRA) is available if the double condition is fulfilled, i.e. the expenses actually incurred for the payment of rent for a residential accommodation and that this residential accommodation is occupied by the individual”, says Sonu Iyer, tax partner and head of the services of personal counsel, EY India.

In addition, you must also respect the conditions related to deductions for mortgage loans. Pursuant to Section 23(2) of the Income Tax Act read together with Section 24(b), interest on the housing loan may be claimed as a deduction for owning a detached house up to at Rs 2 lakh per financial year. “This deduction is only available if the ownership of the house is occupied by an individual or cannot be effectively occupied by the individual owner due to the fact that because of his employment, business or profession exercised at any other place, he must reside at that place “other place” in a building that does not belong to him. In other words, it is vacant because of the individual’s employment at another place”, explains Iyer.

Although the owned property may be vacant or occupied by other family members, you can still treat it as a freestanding home. “The law allows an individual to claim a deduction for interest on a home loan for property that cannot be occupied by the individual because of his employment, business or profession exercised in another location,” states Iyer.

So, if you live in a different city because of your profession or job, you are entitled to claim both deductions simultaneously. “In the example above, since the individual cannot occupy his own property due to his employment in another city, he can claim a deduction for both the HRA (for the rented property) and the interest on the home loan for independent property,” says Iyer. You can also claim up to Rs 1.5 lakh for principal repayment of a home loan on a freestanding property.

Scenario 2: Owning a house but renting in the same city

Cities have gotten bigger, and for many a one-way trip to work can take several hours. Many people prefer to move their accommodation closer to their place of work to reduce their commuting hours. So you can claim both deductions while living in the same city.

“In special circumstances, if an assessee can prove that the property owned is far enough away from the place of employment and therefore the rented accommodation has been used, the HRA tax exemption and home loan benefits may both be used,” says Deepak Jain, CEO, TaxManager.in, a tax filing and compliance management portal.

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

Although owned property may still be considered self-acquired property, you may be eligible for a deduction on the principal and interest repayment of a home loan. “Section 23(2) of the IT Act lists the circumstances under which a property may be considered SOP (Self Occupied Property) by an assessee. The conditions are as follows: Where the property consists of a house or part of a house which: (a) is occupied by the owner for the purposes of his own residence; or (b) cannot be effectively occupied by the owner because, by reason of his employment, trade or profession exercised at any other place, he must reside at that other place in a building which does not belong to him. Also, the property should not actually be rented at any time of the year,” says Surana, Founder of RSM India.

However, other reasons for living in the same city may not help claim the owned property as self-occupied and obtain an HRA tax deduction. “The provisions do not explicitly provide an explanation/clarification/comment on the definition of “other location” with respect to the neighborhood/area/city/state of the property to be located. do not extend the benefit of considering a property as an SOP to the case where the person cannot actually reside in a self-owned property due to proximity to the children’s school,” says Surana.

So, if the reason is workplace-related, claiming both deductions together won’t be difficult. “Under the Income Tax Act, an individual may claim a deduction for interest on a home loan for property which cannot be occupied by the individual because of his employment, business or profession. exercised in another place,” says Iyer. “However, such a person should be careful and keep substantial evidence to prove that they have to reside in any other place because of their employment,” Iyer adds.

Scenario 3: If someone is renting their house and living in the same city renting

Except for proximity to the workplace, there can be many other compelling reasons for a person not to live in their home but in rented accommodation. “These reasons can be like the owned house is too small for the family or the children’s school is close to the rented accommodation,” says Jain. Can both deductions be claimed in such a case?

Yes, but this is not possible with a detached house as this can only happen when you rent out your property. “If a person rents their own property and lives in the same town or any other town for any reason, including proximity to the children’s school or place of work, etc., the person will be eligible to claim the HRA benefits as well as the repayment of the home loan,” explains Surana However, in case of rented property, only the deduction on the interest payment is available.

If you have genuine reasons, nothing prevents you from claiming both deductions together. “For an assessee who is renting their home and who, for good faith reasons, lives in the same city rented, one can claim a tax benefit for the repayment of the mortgage on the property that is rented and can also claim the HRA on the property in which he resides. Jain said.

However, the reason for renting in the same city should be compelling. “The real need to rent your house and live on rent might have to justify the income tax service. There is a possibility of denial because no prescribed rules are given in the law,” says Kaushik.

Although you may have to waive the principal repayment deduction, you could get a maximum deduction of Rs 2 lakh on your home loan interest payment. For many people this may work well as they may not need principal repayment at all as they may be exhausted through other avenues such as EPF contribution, NPS contribution, tuition children, life insurance and investments such as ELSS, PPF, ELSS, NSC and soon. If your annual interest payment is much higher than Rs 2 lakh, there are changes that your net loss of income from home ownership is more than Rs 2 lakh, giving you a deduction advantage complete despite rental income.

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