4 Ways to Get HRA Exemption Along With Home Loan Tax Benefits

AT the outset, let me clarify that there is no direct relationship whatsoever between claiming HRA tax exemption and claiming tax breaks on home loans (interest deduction under section 24(b) and principal repayment under section 80C). There are separate provisions in the income tax Act, 1961, for each of the two and one does not influence the other. Depending upon the particular facts and circumstances, you may or may not be able to claim both the benefits.

For claiming HRA tax exemption under section (u/s) 10(13A) of Income Tax Act, 1961, read with rule 2A of Income Tax Rules, the only condition is that you should be living in a rented accommodation for which you should be paying rent. Now, if you stay in your own house, you can’t pay rent to yourself and therefore the whole of the HRA received by you becomes taxable.

However, there still remains a possibility that even if you own a house, you stay in a rented accommodation/any other accommodation. It can be due to following reasons:

1. You've rented your own house while you stay in a rented accommodation
In such a case you'll be entitled for HRA tax exemption. However, rental income from your own house will be taxed in your hands while allowing interest deduction under section 24(b) and deduction for principal repayment under section 80C.


2. Your own house remains unoccupied while you stay in any other accommodation due to employment/business/profession reasons
You may stay at a place – it may be a different city or a different location within the same city - different from the place where your own house is situated.

Here there are two possibilities:

a. Rented accommodation i.e., you're paying rent
In this case, you can claim HRA tax exemption while your house will also be treated as self occupied house property for purpose of income tax and you'll get all the housing loan tax benefits i.e., both interest deduction u/s 24(b) and principal repayment under section 80C.

b. Non-rented accommodation i.e., you're not paying rent As the rent is not being paid, the question of HRA tax exemption does not arise. However, your house will be treated as self-occupied and you'll get the housing loan tax concessions (i.e., interest deduction under section 24 and deduction for principal repayment under section 80C).

3. Your house remains unoccupied while you stay in any other accommodation due to any other reason whatsoever (other than professional/employment/business reasons)

Here again, there are two possibilities:

a. Rented accommodation i.e., you're paying rent
In such a case, although you'll be entitled for HRA deduction, your own house loses the status of self-occupied property and will be treated as deemed to be let out, and thus its notional rental income will be taxable in your hands.

b. Non-rented accommodation i.e., you're not paying rent
For instance, for your personal convenience you live with your parents in their house while your house remains unoccupied. Here, if you don’t pay any rent, you're not entitled for HRA deduction.

Further, your own house won’t be treated as self-occupied for tax purposes.In other words, your own house will be treated as deemed to be let out and its notional rental income will be taxable in your hands.

However, irrespective of tax status of house i.e., whether self-occupied/deemed to be let-out/let-out, you'll continue to get the interest deduction on home loan under section 24(b) and deduction for principal repayment under section 80C.

4. The new house is not in your name. It belongs to any of your relative (spouse/parent’s) and you actually pay rent to the owner of the house.
In such a case also you'll be entitled for HRA tax exemption but the owner of the house who may be your spouse or parent(s) is assessable for the rental income derived from the house. Also, remember that it should a genuine transaction and not a colourable device to evade tax.

However, there is a difference of opinion among tax experts regarding payment of rent to spouse. According to one opinion, there is nothing wrong in paying rent to a spouse so long as it is not a sham transaction. The other view is that there can’t be any commercial transaction between husband and wife.

I tend to agree with the second view and therefore recommend that it is prudent not to indulge in such a dubious transaction which can be questioned by tax authorities and entangle you in legal disputes. Otherwise also, it is always better to err on the side of caution.


Conclusion
In a nutshell, if you've a house, either stay in it or rent it out. Don't leave it vacant. In case you have to leave it vacant, it should be only for employment/business/professional reasons. Even in such a case you should be either living in a different city or at different place within the same city, and not in the immediate vicinity of your house (i.e., the location where you stay should be at a considerable distance from your own house). Otherwise, notional rental income of your house (even if it is the only house you own) becomes taxable in your hands although you continue to get the interest deduction on housing loan u/s 24(b) and deduction for principal repayment of loan u/s 80C.

Furthermore, as regards the HRA, you will be getting the tax exemption under section 10(13A) so long as you are staying in a rented accommodation and actually making the rent payment, irrespective of whether you are having your own house(s) or not.

Finally, If you would like know how to calculate HRA tax exemption, please read How to Calculate HRA Tax Exemption and if you've any query regarding HRA tax exemption, please read How to claim HRA Tax Exemption - Tips & FAQs.

Also see:

1. 10 Smart Tips for Making the Most of Section 80C Deductions

2. Home Loan: Tax Queries