Home loan tax benefits vs HRA tax benefits: Which is better?

Tax savings are important for many people in India, especially salaried individuals. They often choose between two options: saving tax by taking a home loan or saving tax through House Rent Allowance (HRA). Each serves a different purpose, and the right choice depends on your financial goals. Let’s explore how these options work, compare their pros and cons, and determine which one might suit different situations.

What Are Home Loan Tax Benefits?

For those who have taken a home loan to buy a property, the Income Tax Act, of 1961 offers several deductions:

1. Interest Payment Deduction (Section 24):

• You can claim up to INR 2 lakh as a deduction on interest payments.

2. Principal Repayment Deduction (Section 80C):

• The principal portion of your EMI is eligible for deduction up to INR 1.5 lakh under Section 80C. This deduction applies only if you hold the property for five years. If sold before five years, any claimed deductions get reversed.

3. First-Time Homebuyer Deduction (Section 80EEA):

• For first-time homebuyers in the affordable housing sector, an additional INR 1.5 lakh deduction is available on the interest paid, provided the loan does not exceed INR 35 lakh and the property is under INR 45 lakh.
• The primary objective of the provisions is to motivate people to own homes and, at the end of the day, decrease their taxable amount significantly through tax deductions.

Also Read: Home Loan: All You Need to Know – Godrej Capital

Understanding HRA Tax Benefits

House Rent Allowance (HRA) is an allowance received by salaried employees to cover rental expenses. If you receive HRA as part of your salary, you can claim a tax deduction under Section 10 (13A) of the Income Tax Act. The HRA deduction can also be calculated based on:

The lowest of the following is chosen as the deductible HRA amount

• Actual HRA received from the employer.
• 50% of your salary if living in metro cities (Delhi, Mumbai, Kolkata, Chennai) or 40% for non-metro cities.
• Rent paid minus 10% of basic salary.

A tax calculator in India would simplify the process, helping you know how much you would save depending on your income level and rent expenses.

Home Loan Tax Benefits vs. HRA Tax Benefits: Important Differences

Now let us compare the two options side by side.

Eligibility and Applicability

Home Loan Tax Benefits: This benefit is available to taxpayers who have taken a home loan, regardless of whether they reside in the property. It is particularly advantageous for those looking to build wealth by acquiring an asset.

HRA Tax Benefits: This applies exclusively to salaried employees who rent residential properties and receive HRA as part of their salary package.

Tax Savings Potential:

Home Loan: Homeowners can save up to INR 3.5 lakh per annum through combined deductions for interest on property loans as well as principal amounts paid.

HRA: HRA can be highly beneficial, especially in metro cities with soaring rental costs, though it largely depends on factors such as the rent amount and the city.

Choosing the Right Option: Which Is Better?

The choice between home loan tax benefits and HRA tax benefits depends on individual circumstances. Here’s a quick guide to help determine which option might suit specific situations:

1. If You Are Renting and Don’t Own Property: HRA tax benefits are the best choice when you are renting an apartment.
2. If You Own Property with a Home Loan: Home loan tax benefits are highly advantageous as they reduce taxable income through deductions on interest payments and principal amounts. This is particularly beneficial for those planning to reside in the property long-term.
3. If You Own a Home but Are Renting Due to Job Requirements: You can claim both HRA and home loan interest deductions if your property is located far from your workplace. Combining these benefits offers the highest tax savings in such cases.

In conclusion,

Each of these tax-saving options has its distinct advantages, and the choice depends on the individual’s financial goals. Loan tax benefits are ideal for those who want property ownership and investment while HRA tax benefits are for those inclined at flexibility through renting due to job requirements. You can use a tax calculator in India to realize the exact amount you will save through each option and decide which option is suitable for you financially depending on your situation.

Apply now to take advantage of these tax benefits and make your tax strategy work for you!

Also read: Home Loan Tax Benefits in the New and Old Tax Regime

FAQs

Q.1. Can you claim both HRA and a home loan for tax exemption?

A. Yes. If your property is under construction, you can simultaneously claim tax deductions for HRA and Housing Loan deductions.

Q.2. Is it better to take a home loan to save tax?

A. Under Section 80C of the IT Act, you can claim tax deductions on the principal amount you repay to your lender. This deduction also applies to your home's registration and stamp duty charges. The maximum housing loan tax exemption under Section 80C is INR 1.5 lakh in a financial year.

Q.3. Which tax regime is better if you have a home loan?

A. You can get tax benefits on home loans under Section 24, 80C, and 80EE/ 80EEA only if you choose the old tax regime. The new tax regime does not include these provisions.

Q.4. How much tax will I save on HRA?

A. The HRA exemption is determined by your basic salary and the actual rent paid. It is typically calculated based on the lowest of the following:

• The actual HRA received from your employer.
• 50% of your salary if you live in a metro city (Delhi, Mumbai, Kolkata, Chennai), or 40% if you reside in a non-metro city.
• Rent paid minus 10% of your basic salary.

Q.5. Can both partners save tax if we take a joint home loan?

A. Yes, both partners can claim tax exemptions on a joint home loan.

Disclaimer:

The contents of this article are for information purposes only & not financial advisory. For more details, please refer to the product or service document and/ or connect with our customer representative prior to making any financial decision. The information is subject to update, completion, revision, and amendment and may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject Godrej Capital or its Affiliates to any requirements. Godrej Capital or its Affiliates shall not be responsible for any direct/indirect loss or liability incurred by the reader for making any financial decisions based on the contents and information mentioned. Please consult your financial advisor before making any financial decision.