Buying a home is not a cakewalk for a large percentage of the Indian population. It is practically not feasible for salaried middle-class individuals to purchase a residential property on down-payment. Anyone who does not own a house can either avail a House Loan and pay for EMIs, or continue to live in rental accommodation at a fixed monthly cost. Thus, each month, they incur a considerable amount towards the housing.
Let’s evaluate both of the situations and find out what is more affordable and a better option for you.
Under the Income Tax Act 1961, the Indian Government has offered tax rebates on housing. Whether you are living in rented accommodation or purchasing a home with the help of a Home Loan, you can claim tax benefits on HRA and loan repayment rebate, respectively.
One of the pressing worries for most of the home seekers is whether one should continue living in rented accommodation or Apply for Home Loan. Here is a comparative analysis to help you make an informed decision.
If you are a salaried individual, then checking your salary slip would help you understand that your salary comprises of various components. One such component is HRA or House Rent Allowance. Under the Income Tax Act 1961, you can claim income tax deductions against the HRA, subject to the following conditions:
Therefore, it can be safely assumed that the maximum HRA exemption available to you would be dependent on three factors, i.e., your basic salary, your HRA, and your rent.
Let’s understand this case with an example:
Mr Vinay Balakrisghnan lives in Mumbai (a metro city) and has a basic salary of Rs. 1,00,000 per month. He pays monthly rent of Rs. 40,000 for his house. The HRA that he receives is Rs. 60,000 per month. Then his exemption will be calculated as:
So, the maximum tax deduction that Mr. X can claim under HRA is Rs. 3,60,000, though he must produce the PAN Card of his landlord for this purpose.
Availing a Home Loan has become a popular option with prospective homebuyers who cannot afford to purchase down payment.
Say, you have availed a Standard Chartered Home Loan. You can enjoy substantial tax benefits under the Income Tax Act 1961 for repayments made towards a Home Loan i.e.
Therefore, the maximum exemption that you can avail towards your Home Loan repayments is Rs. 3,50,000 in a financial year. Your choice of the lender doesn’t impact the benefits, i.e., whether it is a Standard Chartered Bank or RBL Bank Home Loan, the tax deduction will remain the same.
There can be certain situations wherein you can be paying your Home Loan EMI as well as rent to the landlord. In those situations, the treatment would differ slightly:
If you are living in the same property for which you are paying the Home Loan EMI, then you can not claim the HRA exemption and only claim deduction for Home Loan EMI payment.
If you are living in rental accommodation in the same city, where the house against which you are paying Home Loan EMI is located, you can not claim HRA exemption.
Though, if you are living in another city due to your job, then you can claim income tax benefits under HRA as well as Home Loan repayment. Rent that you are receiving (if any) will be added to your income.
There is no clear-cut answer to this question because while the maximum deduction available under Home Loan repayment is capped at Rs. 3,50,000, the maximum deduction available under HRA is dependant on various factors such as basic salary, HRA, and rent.
Therefore in some instances, income tax deduction available under HRA would be more than what is available under Home Loan and vice versa. So, the decision has to be entirely yours while keeping in mind your financial future.
Though, it is pertinent to mention here that according to conventional wisdom, Home Loan EMI is considered as an investment while the rental payment is considered as an expense. So make an informed decision, without haste.
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