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Home Loan Query

Dr. Jones (Director) (253 Points)

06 January 2010

Recently I purchased house in Mumbai, I live in rented house because my house is far from my workplace right now.

I also have housing loan for the flat at Indore.

1. Can I show both the housing loans, Indore flat as self occupied and Mumbai flat as rented?

2. Can I avail tax benifit for HRA?

Thanks!

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23 Replies

Ajay (Accountant) (72 Points)
Replied 06 January 2010

first what you want to ask question is difficult to getting me..............

you said that your resident at mumbai that is rental then how you claim as loan its first part

second your house at indore that is loan , that loan you can claim under section 24 as intrest (SOP)

first rental house at mumbai you can calim as HRA (unsder salary head)

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Amir (Learner) (4016 Points)
Replied 06 January 2010

I think wat u r trying to say is that ur

1) Flat at Mumbai has been let out

2) flat at indore is lying vacant

3) u r presently reding in a rented flat in mumbai.

Now,

1) Benefit of housing loan will be available for both flats but difference would be In case of Flat at Indore the maximum amount of Interest that can be deducted will be Rs. 1,50,000/- whereas in case of flat at Mumbai there is no limit as such..

2) benefit of HRA will be allowed..

1 Like

PANKAJ SHARMA (ACCOUNTS MANAGER) (79 Points)
Replied 06 January 2010

As per Your Information, You own

1) A Flat at Mumbai Which has been let out

2) Flat at indore is lying vacant

3) u r presently residing in a rented flat in mumbai.

Now,

As Per my knowledge, You can avail both i.e benefit of HRA as well as interest on housing loan but the flat at Indore will also be deemed to be let out and Income from house Property will be clubbed from that in your total income

There are many such cases and relaxation is given accordingly in the Income Tax Act, 1961

It will not assumed that that the Flat in Indore is vacant neither it can be treated as SOP as you are claiming HRA.

Vivek Jarial (Student) (272 Points)
Replied 06 January 2010

i agree with pankaj shrama...

Amir (Learner) (4016 Points)
Replied 06 January 2010

Dear Pankaj & VIVEK

Can u please quote section or provision where it is written that "IF A PERSON IS CLAIMING HRA THEN HE CANNOT CLAIM A HOUSE TO BE SELF OCCUPIED"

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PANKAJ SHARMA (ACCOUNTS MANAGER) (79 Points)
Replied 06 January 2010

Contrary to popular opinion, there is no restriction under the I-Tax Act with respect to claims for both.

A number of salaried consumers take a home loan to acquire a residential property, but do not stay in that property for various reasons. They stay in rented premises for which they pay rent. If they are receiving a house rent allowance from their employer, a question frequently arises-whether they can claim exemption of their HRA based on the rent actually paid by them, as well as the interest payable on the loan taken to acquire the owned property.

This is such a widespread question that it rightly justifies an elaborate reply of this kind. If some portions of the reply are difficult to understand, don't worry. The technical portion of the reply really needs to be understood by your HR Department so that they can give you the benefit while calculating the amount of tax deductible at source from your salary. You can also get this benefit while paying the advance tax on your business income.

To answer this question, we need to look at the relevant part of the I-Tax Act and the rules.

The exemption of HRA is covered under Section 10 (13A). Simply speaking, the only conditions for allowing the exemption of HRA are:

Rent must actually be paid by the assessee (legal term for the person whose tax liability is being worked out) for the rented premises which he occupies

The rented premises must not be owned by him.

As long as the rented premises are not owned by the assessee, the exemption of HRA will be available up to the limits specified in the relevant rules. There is no mention here about any effect on the exemption because of ownership of any other property.

Let us now turn to the deduction of interest payable on a home loan. Contrary to popular perception, the interest is not a straight deduction allowed from the salary income. The deduction is actually allowed while calculating the income from house property; although the effect (as we will see below), in the case of self occupied property, is the same as allowing it as direct deduction from salary income.

The relevant sections are Section 22 to Section 27. Again putting it very simply, the calculation of income from house property is done as under:

Rental income (net of municipal taxes) = Annual Value	A
Less : 30% of A as a standard deduction	S
Less: interest payable on any loan taken for acquisition or construction of this property	I

Income from House property A-S-I	H

1) The point that we must remember is that income can also be negative or in other words, include a calculation of loss.

2) In the case of self-occupied property, the annual value \"A\" is taken as \"nil\" (therefore S automatically becomes nil as 30% of 0 is 0) and I is restricted to a maximum of Rs.1, 50, 000. Therefore, in the case of self occupied property; the result of calculation of \"income from house property or H will always be a loss to the extent of the interest payable on the home loan or Rs.1, 50, 000 (whichever is lower).

3) Where the property is given on rent, the annual value will be calculated based on the rental and the final income (or loss) from house property will be calculated as given above. Please note that in such a case, there is no restriction on the maximum amount of deduction available in respect of I.

4) Where the property is lying vacant and is neither rented out nor self-occupied, the rental that could have been derived (had it been rented out) has to be taken as the rental income in respect of such property and the calculation has to be done as in point 3 above. Off course, the calculation of such a notional value has several practical difficulties. If similar property in the neighborhood has been given out on rent, which can serve as a good basis to calculate this figure. There are also a large number of case laws which have gone into the method of calculation of such notional value. You may need expert taxation advice to calculate this figure.

5) \"Income from house property\" is either taxed (if it is positive) or if it is a loss, it is allowed to be setoff against the income from other heads including salary (and hence the popular misconception that interest on home loans is allowed as a deduction from salary income as the impact, in the case of self occupied properties, is the same as a direct deduction of the interest from salary income).
6) There is nothing in the section that affects the exemption of HRA at all. Also, there are no conditions that restrict the availability of deduction of interest based on the assessee's stay in any other premises.

7) At most, some people might point to Section 23 (2) which is relevant for the purpose of allowing the annual value of a self-occupied property to be taken as nil as discussed in point 2 above. Let us examine these objections in some detail. If the discussion from here on is too technical, do not worry. There is no need for you to understand it in detail.

8) There are two circumstances under which the annual value of a self-occupied/vacant property is treated as nil.

Firstly, where the owned property is located in a city different from where the assessee works and because of this he is unable to occupy the owned premises and stays in a rented premises in the city in which he works-he will be able to take the annual value of such a owned property as nil even though, the owned property is not occupied by him for self residence.

Secondly, where the property is located in the same city as the rented premises-but is in his occupation and used for the purposes of his own residence. The question that arises is, how can the assessee claim to occupy the owned property for self residence; when he is also staying in the rented premises? In fact, Section 23(4) clearly recognizes the fact that more than one house property can be occupied and used by the assessee at the same time for the purposes of his own residence.

The next question is what constitutes the occupation of the owner for the purposes of his own residence? The only direct judgment on the issue, of what constitutes occupation of the owner for the purposes of his own residence; is by the Allahabad High Court in the case of CIT vs. Rani Kaniz Abid reported in [1972] Tax LR 587. The facts and decision were as follows:

The assessee owned a house in Karachi. The assessee was not residing in that property but she used to go there occasionally. The property was occupied by her married daughter and son-in-law, who were residing in Karachi. Even though the property was in actual occupation of her daughter and son-in-law, the evidence on record disclosed that she had retained the property for her personal occupation and she occasionally went and resided therein. This the Tribunal found on the basis of an endorsement made in her passports in the relevant years. It was, therefore, clear from the facts brought on record that the assessee visited Karachi at intervals and resided in the property along with her daughter and son-in-law. The court, therefore, came to the conclusion that she retained the house for her occupation while permitting her daughter and son-in-law to reside therein. In the background of these facts, the court came to the conclusion that she was entitled to the benefit under Section 23(2) of the I-T Act.

From this judgment, one can conclude that as long as you retain the right to occupy the owned premises and go and reside there occasionally (say on weekends or during vacations - also means the property is in a habitable condition) and can show some proof for that (electricity bills showing consumption in line with your stay period, letters received at that address during that period, bills for items bought by you from neighborhood shops/hotels during the stay, copies of telephone bills showing (STD) calls made from a fixed line phone from that premises during the period of stay, etc.); you should not face any difficulties in treating the annual value of such properties as nil.

9) If the property is in the same city and has not been occupied by you at all, then there is an additional burden. In respect of such a property, you will need to do the calculation of income from house property based on a notional rent that would have been derived if you had actually rented out the owned premises and calculate the Income (or loss) from house property accordingly. See point 4 above. In this case also there is no restriction on the deductibility of the interest on home loan.

10) If the property is rented out, there is no issue at all. The income (or loss as the case maybe) from house property will be calculated as given above.

In all cases, the deductibility of interest paid on the home loan is not under doubt. Only the annual value could be different, based on where your case falls.

11. The principal amount repaid on all loans taken from specified entities such as banks/employer companies, to acquire/construct residential house property(ies) is allowed as a deduction under Section 80C; up to the overall limit of Rs. 1,00,000-mentioned in that section. This is not at all affected by the exemption of HRA in any manner.

The entire discussion can be summarized as follows:

	Status of owned property (1)	Owned property located in (2)	Deduction available for interest payable on loan taken to acquire/ construct the property (3)	Annual value taken as (4)	Other deductions available (5)	Income / Loss from house property will be equal to (6)
1	Given out on rent	Does not matter	Yes, without any limit	Actual rent received less municipal taxes	30% of the annual value	(4)-(5)- (3)
2	Used for occasional self occup- ation by self (also means that the property is in habitable condition ) or lying vacant or unused maybe, not in habitable condition	Another city, different from the city in which you work	Yes, up to a maximum of Rs. 1,50,000	NIL	30% of NIL is NIL	Always loss equiv- alent to lower of (3) or Rs. 1,50,000
3	Used for occasional self occup- ation by self (also means that the property is in habitable condition )	Same City in which you work	Yes, up to a maximum of Rs. 1,50,000	NIL (see point no. 8 above your HR department may need the case law cited above)	30% of NIL is NIL	Always loss equiv- alent to lower of (3) or Rs. 1,50,000
4	Lying vacant and unused maybe not in habitable condition	Same city in which you work	Yes, without any limit	Notional rent that you could have derived, had you rented out the property less municipal taxes	30% of annual value	(4)-(5)- (3)

jayaraj (accountant) (29 Points)
Replied 06 January 2010

Housing Loan insurance it is compulsory?

any tax benifit for this insurance

PANKAJ SHARMA (ACCOUNTS MANAGER) (79 Points)
Replied 07 January 2010

Housing Loan Insurance is not compulsory but it should be done for the security of the dependants. You get tax benefit for the Insurance U/s 80C upto a maximum amount of Rs. 1,00,000.00

Amir (Learner) (4016 Points)
Replied 07 January 2010

Dear Jayaraj,

As Pankaj Sir rightly mentioned that Housing Loan insurance is not compulsory but Banks/Loan Companies insist on this clause to be on safer side...

I don't think this premiun on account of Insurance of House is elegible for tax benefits..

PANKAJ SHARMA (ACCOUNTS MANAGER) (79 Points)
Replied 07 January 2010

Dear Amir,

The Premium will be paid on account of Insurance of the Borrower and not of House. If something wrong happens to the borrower the Insurer will take care of the future EMI's and their will not be any burden on the dependents of the Borrower.

So, the premium is definitely eligible for Income Tax Benefit U/s 80C

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Amir (Learner) (4016 Points)
Replied 07 January 2010

Dear Pankaj Sir,

I agree with u on this point that if premium is for the life of the borrower then it will be eligible for deduction u/s 80C...

Recently, I got to know that Banks/Financial Institutions are also insisting for the insurance of the House..So in this case it will not be eligible for deduction..

PANKAJ SHARMA (ACCOUNTS MANAGER) (79 Points)
Replied 07 January 2010

Dear Amir,

I did'nt get your point. What the Banks/Financial Institutions have to do with the insurance of the House. They should be concerned only with the borrower. Tommorow if unfortunately the borrower dies, god forbid, for any reason, What the Banks/Financial Institutions will get with the Insurance of House. They will have to sale the House Property to recover the Loan Amount. In that case the amount of insurance for House will be wasted.

I mean to say that no one benefits from the Insurance of House. Even if then the Banks/Financial Institutes insists on House Insurance then they might be the agents of that particular Insurer and they might be getting hefty commissions for that.

Regards,

Pankaj

Amir (Learner) (4016 Points)
Replied 07 January 2010

Dear Pankaj Sir,

Banks etc gives Housing Loan against the security HOUSE..

So God forbids if tomorrow House catches a fire then what would be in the hands of Banks...

Ya u might be rite that Banks must be getting hefty comission on this from insurance co's...These all are great minds of the Business Development Teams of Insurance Companies..