Can you claim HRA and deduction on home loan interest

House Rent Allowance

If you want to claim HRA then you should live on rent. But the question arises that does income tax act gives you permission to claim HRA and also a deduction of interest on home loans?

Sometimes a situation may occur that you are staying in some other country and you have taken a place on rent there but your family lives in some other city and you have purchased a home for your family in the respective city.

In this case, a homeowner has the right to claim:

Deduction of interest on the home loan as per the provisions of section 24.

HRA exemption can also be claimed as per Section 10(13A).

Deduction on repayment of principal as per the provisions of the section 80C.

For example

Rahul lives in Noida and his wife and children live in Sonipat. Rahul is living on rent but he has bought a home on loan for his family in Sonipat. As per the provisions, he can claim HRA for the rent he is paying in Gurgaon and can also claim a deduction of amount till Rs.200000 for the house in Sonipat.

Amit lives in Gurgaon with his wife and kids on rent though his actual house is in Delhi in a very small place. Due to his wife’s workplace and kid’s school, he started living on rent in Gurgaon. He has to pay interest on a loan for his house. He can claim HRA and benefits on the home loan.

Another way of understanding this concept is Divya purchased a house in Delhi though she herself lives in Bangalore and she has no plans of returning to Delhi for about 5 more years. Therefore, she decided to rent the house in Delhi. In Bangalore too she was living on rent. In this case, she can claim the amount of HRA and home loan interest for Delhi flat. By this, she can save a significant amount of tax.

For the purposes of tax assessment, exemption of HRA is shown under the head Income from Salary because HRA is paid by your employer and can be only claimed when you are actually living on rent in a house not owned by you and must be paying it to the landlord. You cannot claim HRA if you are not living in a rented house. All this is irrespective of whether you own a house in the same city or a different city in the same state or a different state or do not own a house at all.

Deduction of interest on the home loan is shown under the head Income from House Property. This is because for assessing your income tax, rental income, if any, is also taken into account. If you don’t own a house, then your rental income will be treated as nil and no tax will be payable on income from house property.

If you own a house, then you can either give it on rent or not. If you give it on rent, then actual rent earned will be treated as a positive and tax will be payable on it subject to deductions. But if you do not give the house on rent, a notional rental income will be taken into account on the basis that you could have given it on rent and then tax is calculated, but since you are not actually earning any rent, so then it is treated as a loss. This loss is set off against the other heads of income including income from salary.

Claiming exemption on HRA and deduction of interest on the home loan are two entirely different concepts and neither is affected by the other. There is no provision stating that both can’t be claimed simultaneously.

But how do you calculate this notional rental income? If another house in the same neighborhood is given on rent, then it serves as a good basis to calculate this income. There are several case laws on calculating this notional rental income. Do smart planning and save your money with the help of Legalraasta.