The most common request is to do with the specific section of the Income-Tax Act (ITA) that allows this. Well, I am afraid that isn't possible since in income-tax language, silence signifies approval. In other words, the ITA need not expressly allow something — lack of express disallowance also signifies intention of approval.
HRA is dealt with by Section 10(13A) read with Rule 2A. Interest on housing loan is deductible under Section 24. Nowhere does it say either in Section 10(13A) or in Section 24 that the two are mutually exclusive. Examples of this concept are many. Let's take, for instance, Section 80C (PPF, NSC, ELSS etc) and Section 80D (medical insurance premium). Everyone will agree that both sections can be separately claimed. But does it expressly say so anywhere?
On the other hand, Section 80GG dealing with deduction on rent paid where the taxpayer doesn't receive HRA, specifically mentions that the taxpayer or his or her spouse/ minor children should not own any residential accommodation where the taxpayer resides, performs the duties of his office or employment or carries out his business.
The section goes on to further add that if the taxpayer owns accommodation at a place other than that mentioned above, the tax deduction in respect of self-occupied property (annual value to be taken as nil) should not be claimed by him. This is express denial. No such provisions exist in respect of HRA.
Another point raised is that the deduction of HRA going hand-in-hand with that on self-occupied property seems paradoxical as an employee staying in a rented house, by definition, cannot live in a self-occupied property. To resolve this dilemma, we need to examine Section 23(2) of ITA.
As per this section, the term "self-occupied property" includes property that cannot be occupied by the owner owing to his employment, business or profession carried on at any other place in a building not belonging to him. Thus, it is not necessary that you have to be occupying or staying in the property, rather, the property should be meant for your occupation.
To spouse is not allowed
Some readers have inquired whether it is possible to pay rent to one's parents. Yes, this can be done. However, the rent paid to the parent will be added to parent's income and taxed in his or her hands. Also, the taxpayer will have to furnish rent receipts to his employer as proof of having paid rent. Note that this arrangement however cannot be carried out in the case of the spouse, as husband and wife cannot have a commercial relationship with each other.
On similar lines, some readers have written in asking whether rent may be paid to a parent where the property is jointly owned by the taxpayer and the parent. Such a transaction, though theoretically feasible, will be in form and substance assumed to be meant as a tax evasion mechanism and hence, not advisable.
An important bit
Lastly, there does exist a related provision that is less commonly known and also hitherto not been discussed. This is to do with regards to the system of taxation of self-occupied property.
Readers would know that the annual value of one self-occupied property is taken to be nil and the interest deductible there under is capped at Rs 1.50 lakh.
Also, as discussed above, such property need not actually be occupied by the owner, rather it should be meant for self occupation. However, this inability to occupy the property should arise by reason of the fact the employment or business or profession is carried out at some other place.
For example, suppose Sanjay owns a house but continues to reside with his parents who live in the same neighbourhood. In such case, Sanjay's house is vacant not out of any professional or business compulsion but out of choice and personal convenience. Here, the annual value of the self-occupied house will not be taken as nil — it will be deemed to be let out and the notional rent will be brought to tax.
Consequently, the full amount of the interest on housing loan will be tax deductible without any cap. Needless to add, if Sanjay were to pay rent to his parents, the HRA deduction will continue to apply.
