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 HRA

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

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

The least of these four amounts will the exempted from taxation. Here is an example:

Basic salary (per annum)Rs. 5,00,000
DARs. 80,000
HRARs. 60,000  
RentRs. 84,000
Metro cityNo
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)26,000  

When is tax-deduction on HRA 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)

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

Which option is better?

Tax benefits on housing loans 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.) 

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. 

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. 

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

The bottom line

You can claim tax benefits on both your ongoing housing loan and HRA. 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 affordableinterest rates and flexible repayment.

Visit our website to check your home loan eligibility and explore our loan offerings.  

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