Please Help: HRA AND HOME LOAN

Dear Naresh,

Please refer the discussion below wherein the doubt raised by you has been addressed in a detailed way.
HRA exemption - There is nothing in the I T Act which says if you have house in same city , you can not claim exemption u/s 10(13) on HRA allowance. So, if you get HRA , you can always compute and claim exemption on house rent allowance . Most important condition is rent payment evidence.
80C deduction - 80C deduction is allowed on payment of principal amount of loan. Therefore , even this deduction is claimable irrespective of issue whether you have a house in the same city where you live in a rented house. The only important condition is that you should have a certificate from loan lender regarding amount of repayment of principal loan.
Interest u/s 24 under house property - Nowhere , it is mentioned that if you are staying in a rented house , you will not get the deduction of interest paid or payable on the loan borrowed and used for buying the house .What it means that everyone who buys or constructs a house will get deduction of interest u/s 24 of the I T Act , so long as his income from house property is charged to tax.
But there is one exception to the rule that the house property income must be charged in order to claim deduction u/s 24 . That is , in case of one self occupied house , the value of the house will be taken NIL , but one can still claim the interest deduction.
The rule that the house must be self occupied is also has one exception. That is if the house could not be occupied for the reason of employment or profession . For example , if you have a house in Banglore , you pay interest on borrowed loan, and you have been transferred out of Bangalore. In that case although , you are not self occupying the house at Banglore, you as per section 23 of the I T Act you can still claim the annual value of property as NIl and can claim interest deduction.Section 23(2) is 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.

What happens if the house bought is in same city where you are living in rented house?
Interest , as I said earlier , will always be allowable. But annual value of the property , even if not put to rent shall be charged to tax under house property because it is not self occupied as there is proof that you are receiving rent allowance from your company .
If you do not want your notional rent (annual value ) to be taken as income and then interest is deducted, you will have to prove that the on account of your profession or employment , you are compelled to live in a rented house and not in your bought house. As was done 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.

Hope the above suffice.