Own two houses? Here’s how to claim a tax deduction on the HRA and home loan repayment
Why a detached house saves more money
Your EMI home loan consists of two parts, namely interest and principal. Initially, the interest share is higher in the EMI pie, but it gradually decreases over time with the repayment of the principal, which in turn reduces the outstanding amount of the loan. In the case of a rental house, you can only claim a tax deduction on the interest payment of a mortgage.
On the other hand, a self-occupied house offers you two possibilities for tax savings which are interest payment and principal repayment. You can get a deduction of Rs 2 lakh under Section 24b of the Income Tax Act 1961 on payment of interest and Rs 1.5 lakh on repayment of principal under section 80C.
A new rule allows you to have two independent houses and save taxes
Previously, if you owned two houses, you could only declare one as self-occupied. However, when it came to the second home, the landlord was required by income tax law to treat it as deemed to be rented and to include its fair rent in income and pay taxes, even when the house was vacant or occupied by a family member.
However, the rule has been changed to allow people to have two self-occupied houses (SOPs). “As of the 2019-20 financial year, the finance law allowed individuals to claim 2 houses as independent property. So, an individual who owns 2 houses, whether in the same city or in different cities, can claim the benefit of 2 SOPs under the IT law,” says Suresh Surana, Founder of RSM India.
Let us now understand how you can save taxes in various scenarios and when it would be best to rent out your property.
Scenario 1: Two independent houses in different cities and living in rental in one of these two cities
Many people own two independent properties in different cities, which are either vacant or occupied by a family member, but the owner of the property lives on rent in one of these two cities. Can they claim a tax benefit for the repayment of the HRA and the mortgage?
They can claim both deductions together, but there is a condition. “Since the individual cannot occupy either of the two independent houses due to his employment at another location, he can claim a deduction for both the HRA (for the rented property) and the interest on the housing loan for both self-contained properties (up to total Rs 2 lakh per fiscal year),” says Sonu Iyer, Tax Partner and Head of People Advisory Services, EY India. that the HRA must be part of your salary, you actually pay the rent and live in that rented accommodation.
Income tax rules allow people to live in another property in the same city only when necessary due to employment. “The “other place” referred to in the income tax law in the context of claiming interest deduction for independent property may also be in the same city and not necessarily in a different city. may refer to the case of CIT vs. Mr. Justice Avadh Behari Rohatgi (157 ITR 441) (Delhi High Court, 1985) where it was held that, on a proper pattern of facts, the reference in the section is to ” another place” and not to another town. In this case, the assessee was a High Court judge who was to reside in official accommodation provided to him in the same town where he already owned his own residential property”, explains Iyer.
While claiming these two deductions together, you must be thorough with the documentation. “A person who intends to claim a deduction for both the HRA (for rented property) and the interest on a home loan (for real estate) should exercise caution and retain substantial evidence to prove that she has to reside at any other place because of her job,” Iyer said.
Scenario 2: Two independent houses in different cities and living in a rental in a third city
Many people have their home in their home town and buy property in another town. If they live on rent in a third city, can they claim a tax benefit for HRA and home loan repayment? “Yes, if you don’t have a home in a city you work in, you can claim both the HRA and the home loan interest tax benefit, whether you have one or two independent homes. Ideally, a freestanding house outside of town should be rented or used by the family,” says Sudhir Kaushik, co-founder and CEO of TaxSpanner.Com.
Here, the reason is very clear, it is that you do not have a house in the city of your job and therefore you have to live on rent. “As of fiscal year 2019-2020, two house properties can be considered self-contained. As the individual cannot occupy either of the two self-contained houses due to his employment at another location, he can claim a deduction for the two HRAs (for rental properties) and interest on the housing loan for the two self-occupied properties up to a total of Rs 2 lakh per financial year,” says Iyer. a deduction of up to Rs 1.5 lakh on the repayment of the principal of the home loan under Section 80C.
Scenario 3: Two independent houses in a city and living for rent in the same city
You can claim a house that is not in the town where you live as an independent house if you cannot live in that property because of your job.
If you live in rented accommodation in the city where you work, there should be no problem claiming the HRA deduction if it is part of your salary. “To claim HRA benefit under Section 10 (13A), the person must not own such property and the rent is actually paid by the person,” Surana explains.
Now we are left with the second owned house in the same city where you work but live in rental. The only factor that can help you claim second ownership as a freelancer would be how close your rented accommodation is to your workplace.
“Section 23(2) of the Information Technology Act lists the circumstances in which property may be considered SOP by an assessee. The conditions are as follows: Where the property consists of a house or part of a house which: (a) is occupied by the owner for the purposes of his own residence; or (b) cannot be effectively occupied by the owner because, by reason of his employment, trade or profession carried on at any other place, he must reside at that other place in a building which does not belong to him. Plus, the property shouldn’t actually be rented out at any time of the year, Surana says.
So, if the house you own is far from your place of work and the rented accommodation is closer to your place of work, you can declare that the second property is occupied by yourself. “Although he owns 2 properties in the same city, if a person stays in a rented property to be closer to their place of work or business, they will still be able to claim an exemption for HRA as well as an interest deduction paid on the home loan u/s 24(b) and deduction for repaid principal u/s 80C (subject to an aggregate limit of Rs. 1.5 lakh u/s 80C),” says Surana.
Scenario 4: Two independent houses in one city and living in a rental in any other city
Just like in the case above, the two houses in a city where you cannot live due to a job in another city can easily be considered independent. And since you live on rent in another city, you can claim HRA if it’s part of your salary and you pay the rent.
Scenario 5: Rents one or both houses in different cities and lives rented in a third city
As explained above, since you don’t own property in the city of your employment, it shouldn’t be a problem to settle the two deductions together. You can either have one property self-occupied and another rented, or both properties rented. However, you will not be able to claim a deduction with respect to repayment of principal on the property that is being rented. You can only opt for a deduction with regard to the payment of interest. Also, when you rent out your property, you must include its rent in your total income when calculating income tax.