I was at a house warming ceremony of a friend last week. My friend, instead of looking happy of having finally managed to buy his first house, had a worried look on his face.
"So what is bothering you?" I asked. "Is the wife being too jumpy as usual?"
"Well that part of life I have adjusted to. But I was worried about something else. Now that I have a home loan EMI (equated monthly installment) to pay up, I need to ensure I don't get fired at work," he said, with a smirk on his face.
"Yeah your habit of putting things in a very matter of fact manner will have to be controlled," I said jovially. "And do remember to say nice things to your boss now and then."
"Hmmm. But that's not what I am bothered about."
"Oh. Then?" I asked.
"See till now I used to claim a deduction for my HRA (house rent allowance) against my taxable income."
"Oh, now that I have taken a home loan to buy a house, I will not be able to claim a deduction on my HRA."
"And why is that?"
"Well now I plan to claim a deduction on the interest portion of the home loan that I have to repay. Given this, I will not be able to claim a deduction on my HRA," he said with grave concern on his face.
"And who told you that?"
"Oh my company accountant!"
"But you don't plan to stay in this house that you have bought. Right?
"Yeah. My parents will stay here," he explained.
"Then you can claim both the deductions."
"Oh. Can I?"
"Yes, you can. As far as the Income Tax Act is concerned one does not influence the other."
"Well, I thought as much. But my company accountant told me to specify the relevant section in the Income Tax Act which says that."
"Hah. That's the problem with these accountants. They are too bookish and cannot interpret anything. The next time you meet him ask him which section in the Income Tax Act specifies that if you are claiming interest that you pay on your home loan as a deduction you cannot claim HRA as a deduction as well? In the language of the Income Tax Act silence signifies approval," I explained.
"Silence signifies approval?" he asked. "What do you mean by that?"
"Let me give you an example to explain this. You claim deductions under Section 80C for investments in employees provident fund, public provident fund, tax saving mutual funds, life insurance and so on. You also claim a deduction for payment of premium towards medical insurance under Section 80D. Both these deductions are separately claimed but does any section of the Income Tax Act expressly say so?"
"Now that you put it this way, it makes perfect sense."
"As far as HRA is concerned, the deduction is covered under Section 10 (13A) of the Income Tax Act. It clearly specifies that the tax payer should be paying rent for a house he does not own. As long as this condition is met a taxpayer can claim a deduction for his HRA."
"Oh. I did not know that."
"So as long as the rented place is not owned by the taxpayer, which by its very definition cannot, he can claim a deduction as specified. This or any other section does not specify that this deduction cannot be claimed in case the tax payer owns any other property."
"So I can claim both the deductions?"
'Yes you can claim a deduction of a maximum of Rs 1.5 lakh for the interest that you pay on your home loan and you can claim a deduction for your HRA as well," I explained.
"But I had another doubts here?" he asked.
"I was reading somewhere that in order claim the interest paid on the home loan as a deduction the home has to be self occupied. Now if I live in a rented accommodation how can the home I have bought on a home loan be self occupied?"
"Very good question. How can the home you have bought be self occupied when you are living in a rented accommodation?"
"Yes. That's my question," he replied. "I can't be living at two places at the same time."
"For this we need to look at Section 23(2) of the Income Tax Act. The term self occupied property includes property that cannot be occupied by the owner due to his business or profession or employment, being carried on at any other place in a building that he does not own. What this means is that a self occupied property should be meant for your occupation and you need not be necessarily living there," I explained.
"Hmmm. Nothing is ever like it seems!" he exclaimed.
"Especially when it comes to the Income Tax Act."
"And now that we have got into some detail, how does the HRA deduction work?" he asked.
"As per section 10(13A) of the Income Tax Act, the deduction is restricted to a minimum of: a) The actual HRA that you get b) the actual rent paid less 10% of your salary, where salary includes the basic salary plus the dearness allowance c) 50% of the salary if the rented house is situated at Mumbai, Chennai, Kolkata and Delhi and 40% of the salary in any other case. The HRA that an individual receives over and above this is included as a part of the taxable income."
"So how would it work in my case? You know my HRA is Rs 30,000 per month or Rs 3.6. lakh per year, and I pay a rent of Rs 22,000 per month."
"What is your basic salary?"
"My basic is Rs 60,000 per month."
I picked up a piece of paper that was lying around and got cracking on the math. "The actual HRA you get is Rs 30,000 per month. The actual rent paid less 10% of your salary works out to Rs 16,000 (Rs 22,000 - 10% of Rs 60,000). And 50% of your basic salary works out to Rs 30,000. As you can see the minimum amount works out to Rs 16,000 per month or Rs 1.92 lakh per year. And that is the amount that you can claim as a deduction from your taxable income. The remaining portion of your HRA i.e. Rs 1.68 lakh (Rs 3.6 lakh - Rs 1.92 lakh) will be added to your income for the year and taxed at the marginal rate of tax you fall into," came a long wielding explanation from my end.
"So that explains it I guess. You have taken a huge load of my shoulders," my friend said.
"Yes. Now let's have some ras malai and celebrate."