Juggling HRA, loan benefits? Read this

Among all income tax doubts, the issue of House Rent Allowance (HRA) going hand in hand with housing loan deductions seems to vex employees the most. Let's examine this.

Vinayak Rege, who is salaried, says his company doesn't allow deductions for HRA and housing loans simultaneously.

There is no specific section number of the Income Tax Act that allows this. However, in I-T language, silence signifies approval. In other words, the Act need not expressly allow something -- lack of express disallowance also signifies intention of approval.

DIFFERENT SECTIONS

HRA is dealt in Section 10(13A), read with Rule 2A. Interest on housing loan is deductible under Section 24. Nowhere does it say either in Section 10(13A) or in Section 24 that the two are mutually exclusive.

Examples on this concept are many. Take, for instance, Section 80C (PPF, NSC, ELSS, etc) and Section 80D (medical insurance premium). Everyone will agree that both Section 80C and Section 80D can be separately claimed. But does it expressly say so anywhere?

On the other hand, take Section 80GG, dealing with deduction on rent paid where the taxpayer doesn't receive HRA. It specifically says the taxpayer or his or her spouse/minor children should not own any residential accommodation where the taxpayer resides, performs the duties of his office or employment or carries out his business or profession.

The section adds that if the taxpayer owns accommodation at a place other than that mentioned above, the tax deduction in respect of self-occupied property (annual value to be taken as nil) should not be claimed by him. This is express denial. No such provisions exist in respect of HRA.

But the deduction of HRA going hand in hand with that on self-occupied property seems paradoxical, as an employee staying in a rented house, by definition, cannot live in a self-occupied property.

To resolve this, we need to examine Section 23(2) of the I-T Act. It says the term 'self-occupied property' includes property that cannot be occupied by the owner, owing to his employment, business or profession carried on at any other place, in a building not belonging to him.

In other words, it is not necessary that you have to be occupying or staying in the property; rather, the property should be meant for your occupation.

EXPLANATIONS

For those like Tarun Kapoor, who stays with his parents in a house belonging to his father, the question is, since having to pay rent is a pre-requisite for the HRA deduction, can he pay rent to his father and claim the deduction? This can be done.

However, the rent paid by Tarun will be added to his father's income and taxed in his hands. Also, Tarun will have to furnish rent receipts to his employer as proof of having paid rent.

Note that this arrangement cannot be carried out in the case of the spouse. Married couples sometimes buy the house in either person's name.

In this case, the other spouse cannot get away by paying rent to the owner-spouse, as husband and wife cannot have a commercial relationship with each other. At times, the rent may be paid to a parent where the property is jointly owned by the taxpayer and the parent.

Such a transaction, though theoretically feasible, will be assumed to be meant as a tax evasion mechanism.

Last, there does exist a related provision that is less commonly known. However, this has not so much to do with HRA and the deduction on interest on home loans as it has with regard to the system of taxation on self-occupied property.

The annual value of one self-occupied property is taken to be nil and the interest deductible is capped at Rs  1.5 lakh.

Also, as discussed above, such a property need not actually be occupied by the owner; it should be meant for self-occupation.

However, this inability to occupy the property should arise by reason of the fact that the employment or business or profession is carried out at some other place.

So, assume Vikram, a taxpayer, owns a house but continues to reside with his parents, who live in the same neighbourhood.

In other words, Vikram's own house is vacant not out of any professional or business compulsion but out of choice and personal convenience.

In such a case, the annual value of the self-occupied house will not be taken as nil. Instead, it will be deemed to be let out and the notional rent brought to tax.

Consequently, the full amount of the interest on housing loan will be tax-deductible without any cap. Needless to add, if Vikram were to pay rent to his parents, the HRA deduction will continue to apply.

The writer is Director, Wonderland Consultants