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They can avail HRA exemption and deduct interest on home loans

Harsh Roongta

“Can I get both, exemption of HRA as well as deduction in respect of home loan?” This is asked frequently by homeowners living outside the town where the house is.
That’s because these days, it’s common practice for people to relocate to other cities for work, with the intention of coming back to our home city at a future date. If we relocate, we live on rent in the new city, and continue to own the property back home.

Even if we live in the same city where we work, travelling distances can be quite daunting. Imagine a two hour commute to work everyday — say, someone living in Dhanu Road but having office at Colaba, to give an example from Mumbai. How many of us will be able to last this regimen?

Hence, some of us live in rented accommodation near the workplace, even while keeping a house in the same city.

So, what if we want to claim tax benefits on the home taken, as well as claim exemption for our rented house?

The answer is yes, we can.

Claiming deduction for interest payable on a home loan and claiming exemption for HRA in respect of rent is completely de-linked. There is no restriction with respect to claims for both.

Exemption of HRA is covered under Section 10 (13A). The only conditions for allowing the exemption of HRA are:

l Rent must actually be paid by the assessee (legal term for the person whose tax liability is being worked out) for the rented premises which he occupies, the rented premises must not be owned by him.

2 As long as the rented premises are not owned by the assessee, the exemption of HRA will be available up to the limits specified in the relevant rules. There is no mention here about any effect on the exemption because of ownership of any other property.

Let us now turn to the deduction of interest payable on a home loan. The interest is not a straight deduction allowed from the salary income. The deduction is actually allowed while calculating the income from house property, although the effect in the case of self-occupied property is the same as allowing it as direct deduction from salary income. The relevant sections are Section 22 to Section 27. The calculation of incomefrom house property is done using the following calculation:

1 Rental income (net of municipal taxes) = Annual value (A)
2 Less: 30% of A as a standard deduction (S)
3 Less: Interest payable on any loan taken for acquisition or construction of this property (I)

l Income from house property = A-S-I (H)
The point to remember is that income can also be negative, or in other words, include a calculation of loss.

In the case of self-occupied property, the annual value ‘A’ is taken as nil. Therefore, ‘S’ automatically becomes nil (as 30% of 0 is 0) and ‘I’ is restricted to a maximum of Rs 1.5 lakh. Therefore, in the case of self-occupied property, the result of calculation of income from house property or ‘H’ will always be a loss to the extent of the interest payable on the home loan or Rs 1.5 lakh.

Where the owned property is given on rent, the annual value will be calculated based on the rental and the final income (or loss) from house property will be calculated as given above. Please note that in such a case, there is no restriction on the maximum amount of deduction available in respect of ‘I’.

Where the owned property is lying vacant and is neither rented out nor self-occupied, the rental that could have been derived has to be taken as the rental income and the calculation has to be done as in point 3 above.

The calculation of such a notional value has several difficulties. So, if a similar property in the neighborhood has been given out on rent, it can serve as a good basis to calculate this figure.

There are also a large number of case laws which have gone into the method of calculation of notional value. You may need expert taxation advice to calculate this figure.

“Income from house property” is taxed if it is positive and allowed to be set off against income from other heads if it is a loss. There is nothing in the section that affects exemption of HRA. Also, there are no restrictions against deducting interest in case the assessee is staying in any other premises in the same city, or in another city.

The principal amount repaid on all loans taken from specified entities such as banks/ employer companies, to acquire/ construct residential house property is allowed as a deduction under Section 80C up to the overall limit of Rs 1 lakh. This is not affected by the exemption of HRA. Thus, homeowners staying elsewhere can enjoy a dual benefit.

Note: The proposed direct tax code, if implemented, will make this issue irrelevant as it neither allows exemption for HRA nor deduction of interest payable on a loan taken to acquire a self-occupied property.