Both HRA and Home Loan Interest tax sections are unrelated. You claim tax benefit on HRA (House Rent Allowance) under section 10(13A) while the tax benefit on payment of interest on home loan comes under section 24(b). However, there can be issues if both the sections are used together with the intent of tax evasion.
We can have four situations for people claiming HRA & Home Loan tax benefit.
- Rented house in place of employment and own house in a different city
- Own flat in the city of employment and stay on a rented house in the same city
- Own flat in the city of employment and stay with parents/siblings in the same city and pay the rent
- Rented house in the different city and own house at the place of employment
Download Automated Income Tax Arrears Relief Calculator U/s 89(1) with Form 10E from F.Y.2000-01 to F.Y. 2018-19
1. Rented house in place of employment and own house in a different city
This is a very easy situation to handle. You can easily claim tax benefit on both and NO employer has an issue with this arrangement.
2. Own flat in the city of employment and stay on a rented house in the same city
This is a tricky situation. The first logical question which comes to mind is why would any person owning a house in the same city stay on rent? Most employers have an issue with this arrangement and may not give tax benefit on both HRA & Home Loan.
But legally you can claim tax benefit on both if you can give a valid reason for this arrangement. The reasons can be it’s more convenient to stay. For e.g. your flat is on the outskirts with almost negligible public transport, you might not want to live there and rather stay close to your place of employment. The other reason could be the owned house is smaller for the size of the family. There are misconceptions that there should be the minimum distance between two houses. All this is a myth! All you need a genuine reason to stay on rent.
Also if you move to your new owned house in the middle of the financial year, it’s a genuine thing to do and you can claim HRA for the period you stayed on rent and house loan benefit for the entire year. In case your employer is not ready to give tax benefit on both – you can claim HRA tax benefit from the employer and claim tax benefit on Home Loan while filing your Income Tax return.
The other question is should the owned house be assumed to have notional rent? The answer is No. If you receive actual rent then show, only then you need to pay tax on that.
3. Own flat in the city of employment and stay with parents/siblings in the same city and pay the rent
The situation is similar as discussed above with the difference being your landlord or landlady is your close relative like parents/siblings. Any such rental transaction is full of suspicion and so you should be very careful if you use this for tax saving. You must do the following:
- Actually, pay the rent through Cheque/ECS etc. and receiver should give rent receipt for the same.
- The landlord/lady should show this rent as “income from house property” and pay taxes on the same.
There have been cases where rent paid to close relatives have been denied tax benefit by income tax department as there was NO evidence of the actual transaction. So stay careful.
4. Rented house in a different city and own house at the place of employment
There may be the case where you have rented a place where your spouse/parents stay (in a different city) while you own a house in the city of your employment and stay there. In this case, you cannot claim HRA tax benefit as HRA is paid for staying on rent for purpose of employment. However, you can easily claim home loan tax benefit.