It does require a bit of brainstorming and cost-benefit analysis to move from rented accommodation to your own home finally. After all, you are already drawing tax benefit on House Rent Allowance (HRA), and now you would be switching to income tax benefits on Home Loan repayments.
Let’s make the decision to buy home easier for you and compare tax benefits on HRA and Home Loan EMIs.
If you are a salaried individual, then you would already know that your salary is made up of several different components. One of the major components of your salary would be HRA or House Rent Allowance. It is an allowance paid by the employer to the employee for the rent of his/her accommodation. Under the Sec 10 (13A) of the Income Tax Act 1961, you can claim Income Tax exemption for the HRA. The maximum available limit is subject to three conditions, out of which the minimum amount is allowed as the exemption.
Actual rent paid by the individual less than 10% of the salary.
Actual HRA received by the individual from the employer.
50% of the salary received by the individual if living in a metropolitan city; 40% of the salary of the individual if living in another city or region
There is actually no maximum amount that you can claim as an exemption against HRA. So, you can maximize your tax savings efficiently through this option.
Home Loan Repayments and Tax Deduction
Home Loan interest rates have become extremely competitive; you can consider availing a Home Loan to become a homeowner and be free from rental payments forever. For instance, SBI Home Loan Interest Rates now start from 7.0% per annum, making them an extremely attractive option.
As Home Loan repayments take up a bulk of the individual’s income, the government allows various deductions under the Income Tax Act, 1961 for the repayments made. The different available deduction is:
Under Sec 80C: Under this section, you can claim a deduction of up to Rs. 1.50 Lakhs against the repayment of the principal component of your Home Loan repayments.
Under Sec 24(B):Apple-converted-spaceUnder this section, you can claim a deduction of up to Rs. 2.00 Lakhs for the repayment of the interest component of your Home Loan EMIs.
Under Sec 80EE:Apple-converted-spaceUnder this section, you can claim an additional deduction of Rs. 50,000 towards the repayment of the interest component subject to the condition that the value of the property is less than Rs.50 Lakhs.
These deductions are available to every borrower who is a co-applicant to the home loan separately. For instance, if you and your wife both are the co-applicants to an SBI Home Loan, both can claim these deductions separately.
Can you claim both HRA exemption and Home Loan deductions together?
Yes, it is certainly possible for you to claim deductions for both the HRA as well as the Home Loan repayments. Though, there are certain conditions which must be fulfilled for availing this benefit, i.e.:
If you are residing in one city due to employment-related reasons and have your home (with an active Home Loan) in another city, then you can claim the deduction for both HRA and Home Loan. Though, you must have documentary evidence for the same.
If you have a let out home (which has an active Home Loan) to someone else and are yourself living in another home that you have rented. To avail of this deduction, you must disclose the rental income from owned property.
If you are living in rental accommodation while your home is under construction. You can claim a deduction for the interest component only and that too in five equal instalments after securing the possession of the home.
HRA vs. Home Loan: Which is a better option?
Now that you are faced with the most important question, it is time to undertake a comparative analysis.
Availability: Home Loan deductions are available for self-employed as well as salaried individuals. It is important to produce the Home Loan account statement to avail of these benefits. Whereas HRA exemption is available only for salaried individuals and to claim this exemption, you need to produce your Salary Slips, Form 16, and the rent receipts.
Maximum amount: After the introduction of the Sec 80EE, the maximum possible deduction available for Home Loan repayments has increased to Rs. 4.00 Lakhs. But when it comes to HRA, there is no maximum limit applicable. You can claim the deduction for the minimum of the three available options for calculating the exemption.
Duration: Deductions for Home Loan repayments can be claimed for the entire repayment tenor of the Home Loan subject to the actual amount paid during the year. Whereas, in the case of HRA, you can claim the deduction only as long as you are working as an employee and are living in rental accommodation.
Nature: Home Loan repayments are considered as an investment because with every EMI, you are reducing the outstanding principal amount. Eventually, when the repayments are over, you will become an undisputed owner of the property. Whereas, in the case of HRA, you will never get the ownership rights of the property, and it will essentially be an expense.
Usage of the property: If you continue to pay your Home Loan EMIs on time, you can use the feature as per your discretion without any interference from the lender. In the case of HRA, you are under the orders of the landlord and might have to vacate the property as and when required by the owner.
It would not be fair to say which of these two options is a better tax saving option because for you. For in many cases, the deduction under Home Loans are more, while in other cases, exemptions under HRA are more. The final decision will vary on a case-to-case basis. Though, it is important to mention that you must consider while making a decision that Home Loan repayments are considered as an investment, whereas rent payment is an expense.
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