Home Loan or HRA: Which One Offers Better Tax Benefits?

Salaried individuals usually have two options for arranging accommodations. They can either take a home loan to buy a home and keep paying EMI from their salary or rent a place.In both cases, you can claim tax exemptions depending on your salary, rent amount, home loan amount, interest rates, and other factors.Therefore, you need to understand HRA vs home loan tax benefits before making an informed choice.

House Rent Allowance (HRA) is a part of the salary. Under Section 10 (13A) of the Income Tax Act of India, you can claim an income tax deduction on your HRA if you live in rented accommodation. The amount of HRA deduction will be the least of the following three amounts.

• HRA provided by your employer
• Actual rent paid less 10% of the salaryNote:- Salary = Basic Pay + Dearness Allowance + Turnover based Commission (if any)

The above calculations can be better understood through the following example.Consider a person named Mr Aman who lives in New Delhi and earns a basic salary (including DA and commissions) of Rs 7 lakhs per annum and an annual HRA of Rs 1.4 lakhs. He pays an annual rent of Rs 3.5 lakhs. Therefore,

• HRA = 1,40,000
• 50 % of salary = 50% of 7,00,000 = 3,50,000
• Actual rent paid less 10% of salary = 3,50,000- (10% of 7,00,000) = 2,80,000

As per the above calculation, the HRA amount of Rs 1,40,000 is the least among the three calculations. Therefore, Mr Aman is eligible for an income tax deduction of Rs 1,40,000 under Section 10 (13A).

You can’t claim any HRA tax deduction even if you receive HRA as a salary component if

• You are not living in rented accommodation.
• You have chosen the new tax regime to file your income tax returns.

You can claim tax benefits on both a home loan and an HRA, depending upon your situation. For instance, consider a situation where you took a home loan to buy a flat in your hometown and then moved to a different city for work where you rent a place.In such a situation, you can avail of income tax benefits on both your home loan repayments and your HRA.But if you can avail tax benefits on any one of the two options, you can consider taking a home loan because you can claim the following income tax deductions on it-

1. Up to Rs 1.5 lakhs on principal repayment under Section 80C.
2. Up to Rs 2 lakhs on interest payment under Section 24.

Besides, having your own home is an asset for you and your family, and a home loan can make this dream come true. However, it is always advisable to weigh HRA vs home loan tax benefits from your own financial perspective to see which one suits your needs better.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.