Why a self-occupied house enables higher savings
Your home loan EMI consists of two parts, namely, interest and principal. Initially, the interest part is higher in the EMI pie, but it comes down gradually with time with principal repayment, which in turn reduces the outstanding amount of the loan. In case of a let-out house, you can only claim tax deduction on the interest payment of a home loan.
On the other hand, a self-occupied house gives you two avenues of saving taxes which are the payment of interest and repayment of principal. You can get Rs 2 lakh deduction under section 24b of the Income-tax Act, 1961 on interest payment and Rs 1.5 lakh on principal repayment under section 80C.
New rule allows you to have two self-occupied houses and save taxes
Earlier if you owned two houses, you could claim only one as self-occupied. However, when it came to the second house, owner was required by income tax law to treat it is as deemed to be let-out and include its fair rent to their income and pay 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). “With effect from Financial Year (FY) 2019-20, the Finance Act permitted individuals to claim 2 houses as a self-occupied property. Thus, an individual 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.
Now let us understand how you can save taxes in various scenarios and when it would be better to let-out your property.
Scenario 1: Two self-occupied houses in different cities and living on rent in any 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 owner of the property lives on rent in any of these two cities. Can they claim income tax benefit for both HRA and home loan repayment?
They can claim both the deductions together, but it comes with a condition. “As the individual cannot occupy any of the two self-occupied houses due to his employment at another place, he may claim deduction for both HRA (for rented property) and interest on housing loan for both the self-occupied properties (up to aggregate Rs 2 lakh per financial year),” says Sonu Iyer, Tax partner & people advisory services leader, EY India. You should meet the condition laid out for claiming HRA deduction, which is that HRA should be part of your salary, you actually pay the rent and live at that rented accommodation.
The income tax rules allow people to live in another property in the same city only when it is needed due to employment. “The ‘other place’ referred to in the Income-tax Act in context of claiming interest deduction for self-occupied property can also be in the same city and not necessarily in a different city. Reference can be drawn to the case of CIT vs. Mr. Justice Avadh Behari Rohatgi (157 ITR 441)(Delhi High Court, 1985) where it was held that, in appropriate fact pattern, that the reference in the section is to ‘other place’ and not other town. In that case, the assessee was a High Court judge who had to reside in official accommodation provided to him in the same city where he already had his own residential property,” says Iyer.
While claiming both these deductions together you should be thorough with the documentation. “An individual who intends to claim deduction for both HRA (for rented property) and interest on housing loan (for owned property) should be careful and maintain substantive evidence to prove that he has to reside at the any other place due to his employment,” says Iyer.
Scenario 2: Two self-occupied houses in different cities and living on rent in third city
Many people have their houses in their hometown and buy a 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 house in a city, you are working then you can claim HRA and home loan interest tax benefit both, irrespective of whether you have one or two self-occupied houses. Ideally self-owned house outside city should be on rent or being used by family,” says Sudhir Kaushik, Co-Founder & CEO, TaxSpanner.Com.
Here the reason is very clear which is you do not own a house in the city of your employment and hence you must live on rent. “Effective Financial Year 2019-20, two house properties can be considered as self-occupied. As the individual cannot occupy any of the two self-occupied houses due to his employment at other place, he may claim deduction for both HRA (for rented property) and interest on housing loan for both the self-occupied properties up to aggregate Rs 2 lakh per financial year,” says Iyer. Self-occupied houses will also make you eligible to claim a deduction up to Rs 1.5 lakh on principal repayment of home loan under section 80C.
Scenario 3: Two self-occupied houses in one city and living on rent in the same city
You can claim a house which is not in the city where you live as a self-occupied house if you cannot live in that property due to your employment.
If you are living in a rented accommodation in the city where you work, there should not be any problem in claiming HRA deduction if it is part of your salary. “For claiming benefit of HRA under Section 10(13A), the person should not own such property and rent is actually paid by the person,” says Surana.
Now we are left with the second owned house being in the same city where you work but are living on rent. The only factor that can help you claim the second property as self-occupied would be proximity of your rented accommodation to your place of employment.
“Section 23(2) of the IT Act lists down the circumstances under which property can be considered as SOPs by an assessee. The conditions are: Where the property consists of a house or part of a house which— (a)is in the occupation of the owner for the purposes of his own residence; or (b)cannot actually be occupied by the owner by reason of the fact that owing to his employment, business or profession carried on at any other place, he has to reside at that other place in a building not belonging to him. Further, the property should not actually be let out at any time during the year, says Surana.
So, if your owned house is far from your place of work and the rented accommodation is closer to your workplace you may claim the second property to be self-occupied. “Despite owning 2 properties in the same city, if an individual stays in a rented property to move closer to his job location or business place, individual will still be eligible to claim exemption for HRA as well as claim deduction for interest paid on house loan u/s 24(b) and deduction for principal repaid u/s 80C (subject to overall limit of Rs. 1.5 lakh u/s 80C),” says Surana.
Scenario 4: Two self-occupied houses in one city and living on rent in any other city
Just like in the case above, the two houses in one city where you can not live due to employment in another city can be easily considered as self-occupied. And since you are living on rent in another city, then you can claim HRA if it is part of your salary, and you are paying the rent.
Scenario 5: Lets out one or both the houses in different cities and living on rent in a third city
As explained above, since you do not own a property in the city of your employment it should not be a problem in calming both the deductions together. You can either have one property as self-occupied and other as let out or both properties being let out on rent. However, you will not be able to claim deduction with regards to principal repayment on the property which is let out. You can only go for deduction with regards to interest payment. Moreover, when you let out your property you have to include its rent to your total income while computing income tax.