Not Living In Your House Can Prove You Costly!

Before I start answering you specific question, I must tell that it is a myth that if one purchase a residential house by borrowing loan , it will always save you tax By the time I finish your question , you will understand why I said so.

First Issue
And as far as rent is concerned, you can will always claim HRA and get the exemption u/s 10(13A) of the I T Act if you pay the rent.

Second Issue
Whether a person living in rented house in same city where he purchases the house on loan , can claim interest as deduction. Yes ,he can always claim deduction , however whether the annual value of the house property shall be taken as NIl is pertinent question. Section 23(2) of the I T Act provides as follows :

• “(2) 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,
• the annual value of such house or part of the house shall be taken to be nil.”

As you can read , if you live in the property or could not live on account of EMPLOYMENT , the value of the house property for computing income shall be taken as NIL.

Now come to section 24 of the I T Act which states as under :

• “24. Income chargeable under the head Income from house property shall be computed after making the following deductions, namely:
• (a) a sum equal to thirty per cent of the annual value;
• (b) where the property has been acquired, constructed, repaired, renewed or reconstructed with borrowed capital, the amount of any interest payable on such capital:…..”

Proviso to section 24 also provide that property referred to in sub-section (2) of section 23, the amount of deduction shall not exceed thirty thousand rupees and in case the property is acquired or constructed with capital borrowed on or after the 1st day of April, 1999 and such acquisition or construction is completed within three years from the end of the financial year in which capital was borrowed, the amount of deduction under this clause shall not exceed one lakh fifty thousand rupees.

Therefore ,combined reading of the these two section namely 23 and 24 , one can infer

1. If the residential property is self occupied or could not be occupied for reasons of employment , the annual value shall be taken as NIL.
2. Interest in that case is limited to Rs 1,50,000 and in other cases any amount is allowed.
   

Now coming specific to your question, in case you are able to prove that the house in question could not be occupied on account employment, the income from such house shall be taken as NIL and interest shall be allowed as deduction .That the rented house is in same city should bot be any problem because there is Delhi High Court judgement in this regard .In CIT/Wealth Tax, Delhi. v.Mr. Justice Avadh Behari Rohatgi.157 ITR 441, the Delhi High Court held that even if a person resides in same same city in a house other than the house purchased by him for the reason of employment , the annual value shall be nil.

In case , you fail to prove that the non occupation of house was not on account of employment but something else the A.O will assess the income from house property in accordance with the provision contained in section 23(1) of the I T Act. But he will allow the deduction for interest u/s 24 of the I T Act. Remember in that case , interest can not be limited to Rs 1,50,000 but any amount which is certified to be paid or payable.