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Payment of House Rent & Interest on Housing Loan

to Family Members can prove a Win-Win Situation !

Replies to the following two readers’ queries provide an interesting insight into some imaginative tax planning.

HRA Exemption for Rent Paid within Family

Query: My family is living jointly with my parents in a residential bungalow owned by my father at Ahmedabad.  My company pays me, annually a Basic Salary and DA of Rs.5,00,000 and HRA of Rs.1,80,000, apart from other taxable perks and allowances worth Rs.3,00,000.  If I pay a fair rent of Rs.20,000 per month to my father, can I claim any benefit of HRA exemption? What would be the tax liability for my father, who is a Senior Citizen earning annual taxable income of around Rs.1,50,000?

Reply: You would be eligible to claim exemption in respect of HRA under Section 10(13A) on the basis of the least of the following three amounts:

  • Annual rent paid (Rs.2,40,000) in excess of 10% of your Basic Salary and DA (Rs.5,00,000), that is Rs.1,90,000 (2,40,000 – 50,000).

  • HRA received from your employer, that is Rs.1,80,000.

  • 40% of your Basic Salary & DA (Rs.5,00,000), that is Rs.2,00,000.

The entire HRA of Rs.1,80,000 can thus be claimed exempt, on which you can save Income-tax of Rs.55,620 at the rate of 30.9% as applicable in your case.

In your father’s case, from the amount of rent of Rs.2,40,000 received by him, he would be entitled to a standard deduction of 30% amounting to Rs.72,000 and hence his taxable rental income would be Rs.1,68,000. Keeping in view the exemption limit of Rs.2,40,000 in the case of Senior Citizens and the benefit of deduction that he can plan under Section 80C upto Rs.1,00,000, he would not attract any tax liability on his taxable income of Rs.3,18,000 (1,50,000+1,68,000). With the rent remaining tax free with your father and your own tax saving of Rs.55,620, it would  be a win-win situation for your family!

Housing Interest Deductible though Payment Deferred!

Query: I am desirous of investing in a house and need a Housing Loan of Rs.20,00,000.  An institutional loan would not only mean bearing a higher interest burden but also adhering to a strict schedule of interest and installment payments. I am wondering if I can consider the option of availing such loan at 7.5% interest per annum from my Senior Citizen father, who would have no objection in granting me accommodation in payments so as to suit my liquidity convenience.  I am in the top tax bracket. I would like to know if I can avail tax deductions for housing interest and installment payments, if I take a housing loan from my father. Can I also claim deduction, if they are not actually paid during the year, but deferred for payment in the later years as per my convenience?

Reply: One of the common misconceptions in the minds of several taxpayers, in regard to the allowability for deduction of interest of upto Rs.1,50,000 available in respect of a self occupied residential house property acquired or constructed with borrowed capital, is that such housing loan should be sourced only from a bank or housing finance institution.  There is no such requirement prescribed under Section 24 and accordingly, the interest payable by you on a loan obtained from any family member or even a friend can very much be eligible for deduction out of your taxable income.

Section 24(b), which provides for deduction of interest on housing loan, refers to the term ‘interest payable’ and not ‘interest paid’. Since this deduction is available on ‘accrual basis’, you can claim the benefit of interest deduction of Rs.1,50,000 (at 7.5% of the Rs.20,00,000) and save tax of Rs.46,350 (at 30.9%), though the interest is not actually paid by you during the year.  You will be required to furnish a certificate from your father from whom you borrow the capital specifying the amount of interest payable by you for the year.  Your father may also be well advised to show this interest income on accrual basis and being a Senior Citizen, he may be able to plan zero tax liability.

However, as regards the deduction for payment of installments of housing loan under Section 80C, the same is available only in respect of actual repayment and that too if the amount is borrowed from the Government, Bank, LIC, Housing Finance Institution or an employer being a Company, Co-operative Society, Local Authority, University or College. Repayment of housing loan installments from a private source, as in your case, is not eligible for deduction under Section 80C. You, however, have several other investment options for availing the benefit of this deduction.

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