House Rent Allowance (HRA) is an allowance employers provide to cover the expenses of rented housing for employees. The Income-tax Act allows for an exemption on HRA if an employee resides in a rented house. Additionally, the Act permits a deduction on the interest paid by an individual taxpayer on a home loan. This deduction applies to housing loans for purchasing, constructing, renovating, or reconstructing a residential property.
Surprisingly, the Income-tax Act allows taxpayers to claim deductions for both House Rent Allowance (HRA) and the interest paid on a home loan within the same financial year. In certain situations, taxpayers may live in a rented house while paying interest on a home loan.
If you own a house but live in a rented one, you can claim both the HRA exemption and the deduction for home loan interest. However, these tax benefits are only available if the owned and rented houses are in different locations, and there is a valid reason for not residing in the owned house. Valid reasons may include working in a different city or the significant distance between the office and the owned house. It is important to note that sufficient explanations must be provided to the employer or income-tax authority if the information is scrutinized.
The following situations are considered genuine, allowing tax officers to accept both deductions:
1. Owned house is let out
If you have rented out the house for which you have a home loan and you live in another rented house, you can claim both deductions. This scenario may arise if the owned house fails to meet your requirements, such as being too small or located far from your workplace. In such cases, you can claim both the HRA exemption and the interest on the home loan. However, you must disclose the rental income from the let-out property in your income tax return.
2. Owned house property is situated in another city
If you own a house in a different city but reside in a rented house in the city where you work, you can claim both deductions.
For example, if an employee works in Gurgaon and lives in a rented apartment while having a property in Noida with a home loan, they can claim deductions for both HRA and home loan interest. This is because they cannot reside in their own house in Noida due to their work location being in Gurgaon.
Employees who pay rent for their accommodation must provide evidence of such payments, such as rent receipts, to their employer to claim exemptions for house rent allowance. If you are claiming an HRA deduction exceeding Rs. 1 lakh per year, you must provide the property owner's PAN (Permanent Account Number). To claim a tax deduction for interest on a housing loan, you must submit the interest certificate as evidence to the employer for the claimed deduction on housing loan interest.
The Income-tax Act does not restrict the claim of deductions to either one or the other; both deductions can be claimed. However, it is crucial to only seek both benefits in genuine cases and not for the purpose of tax evasion.