Why a Self-Owned Home Enables Higher Savings
Your home loan EMI consists of two parts, namely interest and principal. Initially, the interest portion in the EMI pie is high, but it gradually reduces with the repayment of the principal over time, which in turn reduces the outstanding amount of the loan. In case of rented accommodation, you can only claim tax deduction Feather interest payment of a home loan.
On the other hand, a self-occupied house gives you two avenues to save tax which is payment of interest and repayment of principal. You can get a deduction of Rs 2 lakh on interest payment and Rs 1.5 lakh on principal payment under section 80C under section 24B of the Income Tax Act, 1961.
New rule allows you to have two self-occupied houses and save tax
Earlier if you had two houses, you could claim only one as self-occupied. However, when it comes to the second home, the owner was deemed by income tax law to have let it out and included its fair rent in his income and paid taxes, even when The house was vacant or occupied by a family member.
However, the rule was changed to allow people to have two self-occupied houses (SOPs). “From the financial year (FY) 2019-20, the Finance Act allowed individuals to claim 2 houses as self-occupied property. Thus, a person who owns 2 house properties, whether in the same city or in different cities, can claim the benefit of 2 SOPs under the IT Act,” says Suresh Surana, Founder, RSM India. Huh.
Now let us understand how you can save on taxes in different scenarios and when it is better to rent out your property.
Scenario 1: Two self-occupied houses in different cities and rented in either of these two cities
There are many people who have two self-occupied properties in different cities, which are either vacant or occupied by a family member, but the property owner lives on rent in either of these two cities. Can they claim income tax benefit for both HRA and home loan repayment?
They can claim both the deductions simultaneously, but it comes with a condition. “Since the person cannot occupy either of the two self-occupied houses on account of his employment at the second place, he can avail HRA (for rented property) and interest on the housing loan for both the self-occupied properties (total 2 lakh per financial year),” says Sonu Iyer, Tax Partner and People Advisory Services Leader, EY India. You must satisfy the stipulated condition to claim HRA deduction, that HRA should be part of your salary, you actually pay rent and live on that rented accommodation.
Income tax rules allow people to live in another property in the same city only when it is required due to employment. “The ‘other place’ referred to in the Income-tax Act with reference to claiming interest deduction for self-occupied property may also be in the same city and not necessarily in a different city. Reference may be drawn in the case of CIT Vs. Mr. Justice Avadh Bihari Rohatgi (157 ITR 441) (High Court of Delhi, 1985) where it was held that, in the appropriate fact pattern, the reference in the section is ‘other place’ and not other city. In that case, the assessee There was a High Court judge who had to live in the official accommodation provided to him in the same city where he already had his residential property,” says Iyer.
You should be fully aware of the documentation when claiming both these deductions together. “A person who intends to claim deduction for both HRA (for rented property) and housing loan (for owned property) must be careful and maintain sufficient evidence to prove that He has to stay at some other place because of his employment,” says Iyer.
Scenario 2: Two self occupied houses in different cities and living on rent in third city
Many people keep their homes in their hometown and buy property in another city. If they are living on rent in a third city, can they claim income tax benefit for both HRA and home loan repayment? “Yes, if you do not have a home in the city, you are working then you can claim both HRA and home loan interest tax benefit even if you have one or two self-occupied houses. Ideally The self-owned home outside the city should be for rent or to be used by the family, says Sudhir Kaushik, co-founder and CEO of TaxSpanner.com.
The reason here is very clear that you do not have a house in your city of employment and hence you have to live on rent. “Effective financial year 2019-20, two house properties can be treated as self-occupied. Since the person cannot occupy either of the two self-occupied houses on account of his employment at other place, he One can claim deduction for both HRA (for rented property) and interest on home loan up to Rs 2 lakh per financial year for both self-occupied properties,” says Iyer. Self-occupied houses will also make you eligible to claim deduction of up to Rs 1.5 lakh on the principal payment of home loan under Section 80C.
Scenario 3: Two self-occupied houses in a city and living on rent in the same city
You can claim a home that is not in the city where you live as a self-occupied home if you cannot live in that property because of your employment.
If you are living in a rented accommodation in the city where you work, there should be no problem in claiming HRA deduction if it is part of your salary. “To claim the benefit of HRA under section 10(13A), the person should not be the owner of such property and the rent is actually paid by the individual,” says Surana.
Now we have a second owned house living in the same city where you work but living on rent. The only factor that can help you in claiming the second property to be self-occupied would be the proximity of your rented accommodation to your place of employment.
“Section 23(2) of the IT Act lists the circumstances under which the property may be treated as SOP by an assessee. The conditions are: Where the property consists of a house or part of a house which- (a) a) is occupied by the owner for the purposes of his residence; or (b) cannot be actually occupied by the owner by reason of his employment, business or profession carried on at any other place, The location has to live in a building that does not belong to him. Moreover, the property should not actually be let out at any time during the year, says Surana.
So, if the house you own is away from your workplace and the rented accommodation is closer to your workplace, you can claim the second property to be self-occupied. “Despite owning 2 properties in the same city, if a person resides in a rented property to move closer to his place of job or business place, the person can still claim exemption for HRA as well as home Will be eligible to claim deduction for interest paid on loan u/s 24(b) and deduction for principal u/s 80C (Subject to an aggregate limit of Rs.1.5 lakh u/s 80C) ,” says Surana.
Scenario 4: Two self-occupied houses in one city and one on rent in another city
As in the case above, two houses in one city where you cannot live because of employment in the other city can easily be considered self-occupied. And since you are living on rent in another city, you can claim HRA if it is part of your salary, and you are paying rent.
Scenario 5: Rents out one or both houses in different cities and rents out in a third city
As noted above, since you don’t own property in your city of employment, it shouldn’t be a problem to calibrate both deductions together. You can have either one property as self-occupied and the other on rent or both properties can be let out. However, you will not be able to claim deduction in respect of repayment of principal on the let-out property. You can go for deduction only in respect of interest payment. Also, when you let out your property, you have to include the rent in your total income while computing income tax.