A Guide to Claiming HRA and Home Loan Deductions

Although many employees choose to claim income tax deductions either on their House Rent Allowance (HRA) or home loan repayments, only a few take advantage of claiming both deductions simultaneously. 

For salaried individuals with limited tax-saving options, the tax benefits offered through HRA and home loan repayments are crucial for saving a substantial amount of money. 

If you qualify for claiming these deductions concurrently but fail to utilize them to their fullest extent, you are essentially losing out on potential savings from your hard-earned income. Here, we listed down 3 methods for claiming HRA and home loan tax deductions together.

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If you are owning a house but live on rent in the same city

In today's scenario, cities have expanded significantly, resulting in lengthy one-way commutes to workplaces for many individuals. To minimize the time spent commuting, many people choose to relocate their accommodation closer to their workplace. Now, the question arises: Can you claim both deductions if you reside in the same city as your workplace?

With a tax e-filing and compliance management portal, it is possible to claim both HRA tax exemption and home loan benefits in certain special circumstances. 

If an individual can provide evidence that their owned property is significantly distant from their workplace and, as a result, they have opted for rented accommodation, they may be eligible to avail of both tax benefits together.

Founder of RSM India, explains that in order to claim the benefit of House Rent Allowance (HRA) under Section 10(13A), certain conditions must be met. Firstly, the individual should not own the property for which they are seeking HRA benefits. 

Additionally, the rent must be genuinely paid by the individual in order to be eligible for the HRA claim. In other words, HRA can only be claimed if it is a legitimate part of the person's salary and the rental payments are actually made by them.

even if you own a property, you may still be eligible to claim deductions on both the principal and interest repayment of a home loan. The Income Tax Act, specifically Section 23(2), outlines the circumstances under which a property can be considered Self Occupied Property (SOP) for an individual. These conditions include

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➔    If the property is used by the owner for their own residence.
➔    If the owner cannot occupy the property due to their employment, business, or profession in another location, and they reside in a different building that does not belong to them.
➔    Additionally, the property should not be rented out at any time during the year.
➔    By meeting these conditions, you can claim the deductions on the home loan, even if you own the property.

However, it's important to note that reasons other than those specified may not qualify for claiming an owned property as self-occupied and obtaining an HRA tax deduction. According to the provisions, there is no explicit explanation or clarification regarding the definition of "other place" in terms of the vicinity, area, city, or state where the property is situated.

Additionally, based on a straightforward interpretation of the regulations, it seems that the benefit of considering a property as self-occupied does not extend to situations where an individual cannot actually reside in their own property due to the proximity of their children's school.

If the reason for not occupying the owned property is related to employment, it becomes easier to claim both deductions together. According to the Income-tax Act, an individual can claim a deduction for the interest on a housing loan for a property that cannot be occupied due to their employment, business, or profession conducted at another location.

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If you let out of your house & live on rent in the same city

Apart from the proximity to the workplace, there are other valid reasons for individuals to live in rented accommodation instead of their own house, such as the owned house being too small or the rented accommodation being closer to the children's school. In such cases, the question arises whether one can claim both deductions together.

Yes, it is indeed possible to claim both deductions, but only in the case of a property that is given on rent. Dr. Suresh Surana explains that if individual rents out their own property and resides in the same city or any other city for reasons like proximity to their children's school or job location, they are eligible to claim the benefits of both House Rent Allowance (HRA) and home loan repayment. However, if the property is let out, only the deduction on interest payment is available.

If you have valid reasons, there is no restriction on claiming both deductions together. According to Jain, if an individual rent out their owned house and genuinely resides in a rented property in the same city, they can claim tax benefits for home loan repayment on the owned property that is rented out, as well as claim House Rent Allowance (HRA) on the property they currently reside in.

Nevertheless, it is crucial to have a convincing reason for living in a rented property in the same city. Kaushik highlights that the income tax department may require a genuine need to justify both renting out your house and living in a rented property. It is important to note that there is a possibility of disallowance due to the absence of prescribed rules in the tax legislation.

While you may have to forego the deduction for principal repayment, you can still claim a maximum deduction of Rs 2 lakh on the interest payment of your home loan. 

This can be beneficial for individuals who do not require the principal repayment benefit, as they may have exhausted it through other avenues such as EPF contribution, NPS contribution, children's education fees, life insurance, and various investments like ELSS, PPF, NSC, etc. 

If your annual interest payment exceeds Rs 2 lakh, there is a possibility that your net loss from income from house property surpasses Rs 2 lakh, allowing you to claim the full deduction benefit despite rental income.

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If you own a house in one city and live on rent in another city 

If you are living in a rented accommodation in the city where you work and also own a house in another city, you can claim income tax benefits on both House Rent Allowance (HRA) and home loan interest. 

This means you can avail deductions for both the rent paid for your current residence (HRA) and the interest paid on the home loan for your owned property in the other city.

The simplest way to claim both House Rent Allowance (HRA) and home loan deductions together is by meeting the conditions related to HRA. To be eligible, you need to be employed and receive HRA as part of your salary. 

According to Section 10(13A) of the Income-tax Act, exemption from HRA is available if two conditions are fulfilled: actual expenditure on rent for residential accommodation and occupation of that residential accommodation by the individual. Sonu Iyer, Tax partner & people advisory services leader at EY India, confirms this.

In addition, it is important to fulfill the conditions for claiming home loan deductions. According to Section 23(2) of the Income-tax Act, along with Section 24(b), you can claim a deduction for interest on a housing loan for a self-occupied property, up to Rs. 2 lakhs per financial year. 

This deduction is applicable if the house property is either occupied by the individual or if the individual cannot reside in their own property due to their employment, business, or profession conducted at another location. In simpler terms, the property remains vacant due to the individual's employment at another place.

Even if the owned property is vacant or occupied by other family members, you can still consider it a self-occupied house. According to Iyer, the law allows individuals to claim a deduction for the interest on a housing loan for a property that they cannot occupy due to their employment, business, or profession conducted at another location.

Also, Read: "What is Form 10A and How to File it Online?"

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