Purchasing a house is not a cakewalk as it requires a substantial investment. For the majority of India’s lower and middle-income groups, it is not feasible to buy a property on savings alone. Thus, anyone looking for a house can either get a Home Loan and repay the amount comfortably with affordable monthly EMIs or live in rental accommodation by paying a fixed amount every month. One crucial factor to consider when buying or renting a house is that both Home Loans and House Rent Allowances (HRA) come with tax benefits. Read on to learn all about Home Loan vs HRA tax benefits and decide which one is a better option to go for.
House Rent Allowance (HRA)
HRA or House Rent Allowance is a portion of the salary provided by an employer for the expenses incurred for renting an accommodation. The HRA tax savings depends on various factors, such as the house rent allowance granted by the employer, rent paid by the tenant, basic salary, and the location of the property.
HRA Tax Benefit
Tax deductions on House Rent Allowance under the Income Tax Act 1961 can be claimed subject to the following conditions –
- HRA tax benefit can be claimed under Section 10 (13A) Rule 2 of the Income Tax Act.
- Exemptions on HRA are only available for individuals living in rental accommodation.
- HRA exemptions can be declared only in the old regime.
- HRA deductions can be claimed only upon the submission of a valid government ID, such as a PAN card.
- The maximum HRA amount deductible is the least of the following three options:
- Actual house rent allowance granted by the employer
- 50% of the basic salary + Dearness Allowance (DA) (for metro cities) and 40% of the basic salary (for non-metro cities)
- Actual rent paid minus 10% of the basic salary + DA
Thus, the maximum exemption available on HRA would depend on three factors – the rent paid, the house rent allowance, and the basic salary.
When HRA Tax Deductions are Not Possible?
There are a few instances where tax deductions on house rent allowance cannot be claimed. A few have been explained below –
- If an individual receives HRA as a part of their salary but does not live in a rental accommodation
- If an individual files their taxes under the new tax regime as per the Financial Year 2020-21
Income Tax Benefit on Home Loan
For home buyers, tax deductions are available on home loans under the Income Tax Act 1961. An annual deduction of up to INR 2 Lakhs can be claimed on the home loan interest paid. Moreover, an annual deduction of up to INR 1,50,000 can be claimed on the principal amount paid (including the amount spent on registration charges) towards the home loan. Therefore, a buyer can claim a maximum tax deduction of up to INR 3,50,000 on home loans annually.
For instance, if Mr. X takes a loan to purchase a house, he will be entitled to enjoy income tax benefits on the home loan under the following –
- A maximum tax exemption of INR 1,50,000 on the principal amount repaid against the home loan under Section 80C of the Income Tax Act.
- A maximum tax exemption of INR 2,00,000 on the interest paid against the home loan under Section 24B of the Income Tax Act.
Home Loan Repayment + HRA
On certain occasions, an individual could be paying the home loan EMIs and the rent simultaneously. However, in such cases, the tax benefits would be reconsidered and calculated in a different manner based on the situation, as explained below.
Case 1 – If the Property is Self-Occupied
If a person lives in the same property for which he/she is paying home loan EMIs every month, then they shall not be eligible for HRA tax benefit and only claim deductions for the monthly installments paid towards the home loan repayment.
Case 2 – If the Property is Vacant or Let Out
If a person lives on rent in the same city, where the property against which he/she is paying the housing loan EMI is located, then the HRA tax benefit cannot be claimed. However, if they live in a different city due to professional commitments, they shall be eligible to claim income tax benefits on home loans as well as HRA. In such cases, the rent received will be added to their income.
Home Loan vs HRA: Which is Better?
Since income tax benefits on home loans and house rent allowances are very different from one another, it is important for buyers to get a comparison of home loans vs HRA before they can make a decision. Individuals can claim tax exemptions on either of these two or both depending on certain situations.
Let’s say a person took a home loan of INR 75 Lakhs to purchase an apartment worth INR 50 Lakhs 3 years ago. The rate of interest was fixed at 9% and the home loan repayment tenor is 15 years. Now, using a home loan EMI calculator, the EMI would be calculated as –
EMI = P x R x (1+R)^N / [(1+R)^N-1], where
P = Principal
N = loan tenor (in months)
R = rate of interest
EMI = 75,00,000 x 9 X (1+9)^180 / [(1+9)^180-1]
= 76,070
The total EMI payable is INR 76,070, which means in 3 years, the person has repaid INR (76,070 x 36) = INR 27,38,520 (principal and interest combined).
They can enjoy home loan tax exemptions on this amount. According to Section 24 of the Income Tax Act, they can claim up to INR 1,50,000 on the interest component, and under Section 80C, they can claim a tax rebate of up to INR 2,00,000 on the principal component. The maximum home loan tax savings would be applicable on a total amount of INR 3,50,000. Thus, a housing loan offers more significant tax benefits as compared to house rent allowances in terms of income tax deductions.
Now, let’s assume an individual leaves the residence for a job in any of the metro cities and starts living in a rented property. They can still claim tax exemptions on both the housing loan and HRA as long as they meet the basic criteria.
To know home loan vs HRA – which is better, one must understand the following–
- The terms of a home loan (amount to be paid)
- House Rent Allowance, Dearness Allowance (DA), and basic salary
- The current rent being paid
- Income tax bracket
Final Words
Home loan vs HRA is a common query among homeowners and potential buyers. As already explained above, one can claim income tax benefits on a home loan and HRA tax benefits simultaneously subject to specific conditions. Which of these two offers higher savings on taxes depends on the basic salary, rent paid, DA, and home loan EMIs. It is best to discuss home loan vs HRA – which is better with a financial advisor before choosing one of these options to ensure maximum tax savings.
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