There is a thin line between tax planning and tax evasion. Some individuals cross that line and end up on the wrong side of law. One such instance is taxpayers claiming deduction on house rent allowance (HRA) as well as interest paid on home loan while living in their own house.
Claiming deduction on both HRA and home loan principal/interest payments is not prohibited per se, as there are situations where you may be living in a rented accommodation despite owning a house. But some people claim both while living in their own house. This is how they do it. The house where they live is in the name of their wife or parents. So, they show that they are paying 'rent' to wife/parents and claim full HRA deduction.
In the worst case, they live in own house and still claim (partial) HRA deduction and full deduction on home loan interest and principal payments. They can get away with this as there is no need to furnish permanent account number, or PAN, of the landlord if the rent paid is less than Rs 1 lakh a year.
This, however, may come back to haunt them if the case comes under the scrutiny of the tax department.
We discuss situations where you can lawfully claim both deductions and tell you about those where you are pushing your luck a little too far.
You own a house but you live in a rented apartment:
Your workplace is far from your house. The commute to office is a big hassle given the traffic snarls. So, you take an apartment on rent near your office, and let out your own house. This is a common practice in metro cities such as Delhi-NCR, where many people own a house in Noida or Ghaziabad but have to commute daily to their office in Gurgaon.
There can also be a case where you have a house in one city but stay in a rented house in another. In such cases, you can claim deduction on HRA as well as home loan interest and principal payments. "The probable criteria for testing the correctness of the HRA claim and interest deduction by the tax office will be to substantiate that the place of employment and location of the property are different," says Tapati Ghose, partner, Deloitte Haskins & Sells.
You stay in a house owned by your parents or spouse:
You own a house but live in a house owned by your parents or spouse. You show that you pay rent to your parents/spouse and, hence, claim both HRA and home loan payment deductions.
Strictly speaking, you may not be doing anything illegal. The law does not prohibit this provided the full cycle of the transaction has been completed. This means that if you have paid rent to your spouse/parents, they should add it to their incomes and disclosed in tax returns. If your case comes up for scrutiny and you fail to furnish the proof of the transaction, you may be in for trouble.
"Paying rent to your wife or parents for claiming both HRA and Section 24 deduction may not be construed well within the boundaries of law. If your tax return is picked up for audit, such a transaction can be questioned," says Nitin Baijal, director, BMR Advisors. With digitisation of details of income tax assesses and online filing of returns, the authorities now have easy-to-use tracking tools. These enhance the chances of such an anomaly getting caught.
Tax authorities, say experts, are keeping a close eye on transactions among relatives, especially between spouses. "Paying rent to the spouse may not be safe as the tax department may be keeping an eye on such transactions. If the case goes to the tax department, it will be difficult to explain the transaction," says Rakesh Nangia, partner, Nangia and Company.
Living in a self-owned house:
You are staying in the same house for which you have taken a home loan and yet are claiming HRA deduction. The rule says that if you are claiming HRA deduction of more than Rs 1 lakh a year, you have to furnish the PAN of the property owner. So, you claim HRA deduction on rent less than Rs 1 lakh and also claim deduction on home loan interest and principal payments.
Many get away with these adjustments. But if your return is scrutinised for any reason, you may be asked to provide an explanation for all transactions and deductions. You could land into trouble.
However, if you have two properties, one occupied by self and the other let out, you can claim deduction on interest paid for loans taken to buy both the houses. If the house is self-occupied, the maximum deduction on interest paid is Rs 1.5 lakh. However, if the house is let out, the full interest payment can be claimed as a deduction.
LEST YOU RUN OUT OF LUCK
Wilful wrong reporting of income or expenses in order to evade tax is an offence. People who claim HRA deduction by paying rent to parents or spouse and at the same time avail of deduction on home loan interest and principal payments can be seen as wilful tax evaders if they fail to provide proof of their transactions.
Salaried persons, though, can take solace in the fact that the tax authorities do not often come after them if their gross salary is less than a particular amount.