This might surprise few taxpayers but the Income-tax Act allows a deduction for House Rent Allowance (HRA) as well as interest paid on the home loan. Both deductions can be claimed in the same financial year.
In certain situations, a taxpayer may stay in a rented house and also paying interest on the home loan. This situation may arise where a taxpayer works in a city which is different from his home town or he pays interest on home loan taken to buy or construct a house for the parents, spouse or children, etc. whereas the taxpayer is living in rented accommodation due to his job.
One can claim HRA exemption as well as the deduction for interest on home loan if one owns a house but live in a rented house. Both these tax deductions are allowed only if the house one owns and the house one lives in are at different locations and there is a genuine reason for not living in own house. The reasons for this could be that workplace is in a different city, or that your office is too far from your house. But to be noted that sufficient explanations need to be provided to the employer or the income-tax authority in case there is a scrutiny of the details provided.
When HRA tax exemption is allowed?
HRA is an allowance paid by the employers to employees to meet the cost of a rented house taken by them. Income-tax allows exemption in respect of HRA if the employee is staying in a rented house. In order to claim tax exemption, an employee must be paying rent for the house which he actually occupies. In case employee lives in his own house or he does not pay any rent, he cannot claim an exemption for HRA [see details in HRA Exemption].
When Interest on home loan is allowed?
Income-tax Act allows a deduction for interest on the home loan paid by an individual taxpayer. This deduction of interest is available for every housing loan taken for purchase, construction, renovation or reconstruction of a residential house. Amount of tax deduction depends upon the purpose for which house has been occupied – i.e. whether house occupied for own use or house is rented out to others [see details in Interest on home loan].
Whether tax deductions on HRA as well as interest on the home loan can be claimed?
Though the Income-tax Act does not prohibit an employee from claiming a deduction for both (HRA and Interest on housing loan), both deductions should be claimed only in genuine situations. Following situations may be deemed as genuine where tax officer can accept both the deductions.
- Owned property is under construction
You can also claim both these benefits if you take a home loan to buy a house that is under construction, and during the period of construction, you live in a rented house. In this case, you can claim the HRA exemption as well as interest on home loan for that period. However, the interest pertaining to the pre-construction period can be claimed in five equal instalments over the years after you get possession of the house [see details in Interest on home loan].
- Owned hone is let-out
You can claim both the deductions if you have rented out the house on which you have a home loan and you live in another rented house. The reason for doing so could be that the house you own does not suit your needs, say, it is too small or its location is far from your place of work.
Though in this case, you can claim both HRA exemption and interest on a home loan, but you will have to disclose the rental income that you earn from the let-out property in your return of income.
- House property is situated in another city
If you own a house in another city (or location) but you live in a rented house in the city (or location) where you work, in that situation you can claim both the deduction. For instance, an employee A works in Delhi and stays in a rented apartment. He has a property in Gurgaon for which he has taken a home loan. As A cannot stay in his own house in Gurgaon as he is working in Delhi, he is eligible to claim a deduction for both HRA and home loan interest.
- House property is used by family members
If house owned by you is used by your parents/siblings/children and you are staying in a rented house, you can claim both the benefits, even if both the houses are situated in the same city.
What are the documents required to claim both deductions?
An employee paying rent for his accommodation shall submit the evidence for such payment (i.e., rent receipts) to his employer to get exemptions for the house rent allowance. However, if you draw house rent allowance up to Rs. 3,000 per month you can choose not to submit the rent receipt. This concession is limited to the submission of evidence to the employer only. If you are claiming HRA deduction of more than Rs. 1 lakh a year, you have to furnish the PAN of the property owner.
If you are paying rent to your family members, the Assessing officer can ask you to submit the evidence of actual payment made to the family members, i.e., bank statement, electricity bill, etc. The Officer can also ask a copy of their Income-tax return to check if they have shown such rent in their income tax return.
For the claiming tax deduction for interest on housing loan, you need to submit the Interest certificate to the employer as evidence for the deduction claimed towards interest on housing loan. If a loan has been taken from relatives or friends, the employer may ask you to submit a declaration from such friend or relative that the interest disclosed by you has actually been paid to them. The Assessing Officer can also verify the lenders’ bank statement and Income-tax return to verify your claim.
There is no provision in the Income-tax Act that restricts the claim of deduction to only either or any of the one and not both. However, both the benefits should be claimed only in genuine cases and not for tax evasion. One may think that he can get away even after claiming wrong deductions. But if the return is scrutinised for any reason, you may be asked to provide an explanation for all transactions and deductions that could land you in trouble. Wilful wrong reporting of income or expenses in order to evade tax is a punishable offence. People who claim HRA deduction by paying rent to parents or spouse and at the same time avail of deduction on home loan interest can be seen as wilful tax evaders if they fail to provide proof of their transactions.