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Tata Capital > Blog > Loan for Home > Home Loan Vs HRA: Which One Offers Higher Tax Savings?

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Home Loan Vs HRA: Which One Offers Higher Tax Savings?

Home Loan Vs HRA: Which One Offers Higher Tax Savings?

You might be aware of the tax deductions on home loans. But did you know that you can claim a tax deduction on your House Rent Allowance (HRA)? Yes! If you are a salaried person living in rented accommodation, you can do so.

The exemption you can get is dependent on several factors- whether you are living in a metro or non-metro, your basic salary, and your rent.

Suppose you live in a rented place and now decide to finance your own house using a loan. In this case, you are eligible for tax benefits on both the principal and interest amount you pay in one financial year.

So which option will lead to higher tax savings: home loan vs HRA?

Tax exemptions on house rent allowance (HRA)

To calculate tax deductions on HRA as per section 10(13A) Rule 2A, first, you will have to calculate these amounts:

  • Actual house rent allowance received
  • 50% of (basic salary + DA), if you live in a metro city. 40% of (basic salary + DA), if you live in a non-metro city
  • Actual rent paid minus 10% of (basic salary + DA)

The least of these three amounts will then be considered the HRA deductible amount. Let us understand how this works through an example. Suppose a person fits the following criteria:

Basic salary (per annum)Rs. 5,00,000
DA (dearness allowance)Rs. 80,000
HRA (house rent allowance)Rs. 60,000 
Rent (yearly)Rs. 84,000
Is the candidate living in a metro cityNo

Now, with these conditions in mind, let us calculate the amounts we listed earlier:  HRA, 40% of salary+DA, Rent- 10% of salary+DA, and the HRA deductible.

HRARs. 60,000 
40% of Basic Salary +DARs. 2,32,000 
Rent Paid – 10% of basic salary + DA Rs. 26,000
HRA exemption (lowest value)Rs. 26,000 

In this example, the candidate can claim Rs. 26,000 as a tax deductible amount. Now, suppose the basic salary was lower, say Rs. 1,00,000. Let us calculate the four values based on this amount.

HRARs. 60,000
40% of basic salary+DARs. 72,000
Rent paid - 10% of basic salary+DARs. 66,000
HRA exemption (lowest value)Rs. 60,000

When is tax-deduction on HRA not possible?

Tax deduction on HRA is not possible:

  • If you receive HRA as a component of your salary but do not live in a rented home
  • If you choose to file your taxes under the new regime FY 2020-21 (AY 2021-22)

Let us take the earlier example and assume that the person receives HRA with their basic salary. Now, he can only avail tax exemptions on HRA if he lives in a rented home. However, if this individual has also taken a home loan, he will be eligible for home loan tax savings regardless.

Additional Read – What is HRA? How is it Related to Home Loan?

HRA vs home loan: Which option is better?

Home loan tax benefits and HRA are not interconnected. Depending on your situation, you can claim tax benefits for one or both.

Suppose you bought a flat in your hometown for Rs. 30 lakhs three years ago. You took a 10-year loan of Rs. 25 lakhs, and your interest rate was fixed at 8%.

Using a home loan EMI calculator, your EMI value comes to Rs. 30,332. So, in three years, you have repaid Rs. 10,91,952 (both interest and principal.)

Now, you can enjoy all applicable home loan tax benefits. As per Section 80C, you can claim a tax rebate of up to Rs 1 lakh on the principal. As per Section 24, you can claim up to Rs. 1.5 lakh on the home loan interest rate component. Your total home loan tax savings will be applicable on a total amount of Rs. 2.5 lakh.

Now, suppose you leave home for a salaried job in a metro city and live in a rented house. Can you claim tax benefits on your HRA and your housing loan together? Yes, you can, as long as you fulfil the criteria for HRA.

If you do want to compare the two and understand which one is better, you should know that this depends on:

  1. Your home loan terms (amount payable)
  2. Your HRA, basic salary, DA
  3. How much rent you are currently paying
  4. Your tax bracket

Additional Read – Income Tax Benefits on Home Loan for the Year 2020

The bottom line

You can claim home loan tax benefits on your ongoing housing loan and tax benefits on HRA simultaneously. Which one offers higher tax savings will depend on your basic salary, DA, rent, and EMI value.

Are you looking for a housing loan to buy your dream home? Turn to Tata Capital and enjoy affordable interest rates and flexible repayment. Visit our website to check your home loan eligibility and explore our loan offerings. 

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