Can I claim a tax benefit on rent paid in the same city where I own a house?

We assume that you are in employment and are paid a house rent allowance (HRA) by your employer. As per the provisions of the Income Tax Act, exemption towards HRA received from an employer can be claimed subject to fulfilment of the following conditions:

1) The residential accommodation for which rent is being paid should be actually occupied by the assessee;

2) The assessee has incurred actual expenditure towards payment of rent for said accommodation; and

3) The said accommodation is not owned by the assessee.

These provisions do not expressly stipulate that the HRA exemption would not be available if the assessee owns another house in the same city and earns rental income from the same.

However, such claims may be prone to scrutiny by the income tax authorities. In order to justify a claim of HRA exemption, it is important that all the conditions specified above are fulfilled and can be further substantiated with documentary evidence (viz. rent agreement, rent receipts, bank transfer proofs, etc.) and reasonable explanations as to why the taxpayer could not occupy the property owned by him (other than the reason of tax benefit) if queried by the tax authorities.

I have given a loan to my brother at 0.5% interest for one year. He is investing the proceeds only in fixed deposits and mutual funds (safe investments) and is thus able to repay my loan amount back with 0.5% interest. Will this transaction have any clubbing implications on income tax?

—Name withheld on request

We understand that you have given the sum of money under a loan to your brother at a nominal interest rate for a certain period and he would be repaying the loan to you along with the prescribed interest. The interest received by you from your brother on the loan would be taxable in your hands. The clubbing provisions of the Income Tax Act do not cover the situation of clubbing of income derived by your brother from the investments made by him, through the loaned funds received from you.

However, please note that there are certain provisions that bring to tax income in the hands of the transferor, which arises from revocable transfer of assets. Basis the facts of the specific case, there are judicial precedents where courts have taken a view that loan of funds to close relatives with nominal or without interest is nothing but a paper transaction to reduce the tax burden. Hence, the facts and genuineness of loan transactions to relatives may be scrutinized further.

Parizad Sirwalla is partner and head, global mobility services, tax, KPMG in India.

If you have any personal finance query, write to us at mintmoney@livemint.com to get it answered by experts.

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Published: 16 Jun 2024, 04:41 PM IST