Home Loan vs HRA: Which One Can Help You Save More on Tax?

Both home loan and HRA (House Rent Allowance) come with tax benefits, albeit under different Income Tax laws. While paying off your home loan allows you to claim tax deduction on the principal and the interest repaid, HRA is a component of a salaried individual's compensation package, usually provided by the employer, designed to provide tax benefits for the rental accommodation they live in. Each option offers unique advantages that can substantially impact your financial health. 

This blog aims to demystify these options, helping you to make an informed decision based on your financial situation. We will explore how both can offer significant tax savings, delve into their respective advantages, and evaluate the better choice for you.

Home Loan Tax Benefits

1. Understanding Tax Deductions

A house loan offers significant tax savings while assisting you in purchasing your ideal home.

Here’s how:

• Principal Repayment: Under Section 80C of the Income Tax Act, you can claim tax deduction of up to ₹1.5 lakh per annum on the principal amount repayment. This includes payment done towards stamp duty charges.
• Interest Payment: Interest paid on a home loan is deductible up to ₹2 lakh per annum under Section 24(b) of the Income Tax Act
• Additional Deductions: You can claim addition deduction of up to ₹1.5 lakh per year on the interest component (over and above Section 24b) under Section 80EEA if you meet certain terms and conditions. 

Sample Calculation

Imagine you have taken a home loan where the annual repayment amount sums up as follows:

• Loan Amount: ₹40,00,000
• Loan Tenure: 20 years
• Interest Rate: 7.5% p.a.
• EMI: ₹32,200 

Principal Repayment in a Year: ₹1,00,000

Interest Payment in a Year: ₹2,40,000

• Property Ownership: Self-occupied

Tax Benefits Breakdown:

1. Section 80C: Deduction on Principal Repayment

• Maximum deduction allowed: ₹1,50,000 per year.
• Actual principal repayment for this year: ₹1,00,000.
• Deduction under Section 80C = ₹1,00,000.

2. Section 24(b): Deduction on Interest Payment

• Maximum deduction allowed (self-occupied property): ₹2,00,000 per year.
• Actual interest paid this year: ₹2,40,000.
• Since the deduction is capped at ₹2,00,000, you can claim: 
• Deduction under Section 24(b) = ₹2,00,000.

Total Tax Deductions:

• Section 80C (Principal): ₹1,00,000
• Section 24(b) (Interest): ₹2,00,000
• Total Deduction = ₹3,00,000

Tax Savings Calculation (Considering 30% Tax Bracket):

• Tax Savings = ₹3,00,000 × 30% + 4% Cess
• Tax Savings = ₹90,000 + ₹3,600 = ₹93,600

Final Outcome:

• Total Tax Savings = ₹93,600 for the year.

Disclaimer: The above example is for illustration purpose only. Ujjivan SFB does not take any responsibility for the accuracy of the information. Please consult a tax adviser to understand the tax implications.

HRA Tax Benefits

HRA exemption is calculated as the least of the following:

• Actual HRA received from the employer.
• 50% of salary (basic + dearness allowance) for employees living in metro cities (Delhi, Mumbai, Chennai, or Kolkata), or 40% for non-metro cities.
• Actual rent paid minus 10% of salary (basic + dearness allowance).

Example Calculation:

1. CTC: ₹20,00,000 annually
2. Basic Salary: ~40% of CTC (standard assumption) = ₹8,00,000 annually = ₹66,667 per month
3. HRA Component: ~50% of basic salary (common allocation) = ₹4,00,000 annually = ₹33,333 per month
4. Rent Paid: ₹20,000 per month = ₹2,40,000 annually
5. City: Mumbai (metro city, so 50% of basic salary is considered for HRA exemption)
6. Tax Bracket: Highest tax slab (30%).

Step 1: Calculate Tax-Exempt Portion of HRA

The exempt portion of HRA is the least of the following three:

1. Actual HRA Received: ₹33,333 per month = ₹4,00,000 annually

2. 50% of Basic Salary (for metro cities):

   ₹66,667 × 50% = ₹33,333 per month = ₹4,00,000 annually

3. Rent Paid - 10% of Basic Salary:

   Rent Paid = ₹20,000 per month = ₹2,40,000 annually

   10% of Basic Salary = ₹66,667 × 10% = ₹6,667 per month = ₹80,000 annually

   Excess Rent = ₹2,40,000 - ₹80,000 = ₹1,60,000 annually

   The least value is ₹1,60,000.

Step 2: Taxable Portion of HRA

• HRA Received: ₹4,00,000
• Exempt HRA: ₹1,60,000
• Taxable HRA: ₹4,00,000 - ₹1,60,000 = ₹2,40,000

Step 3: Tax Savings via HRA

The exempt HRA of ₹1,60,000 reduces your taxable income. Your tax savings depend on your tax slab:

• 30% Tax Bracket: ₹1,60,000 × 30% = ₹48,000 saved annually.

Disclaimer: The above example is for illustration purpose only. Ujjivan SFB does not take any responsibility for the accuracy of the information. Please consult a tax adviser to understand the tax implications.

Comparison Between Home Loan and HRA Tax Benefits 

Bonus Tip: If you own a house in one city and live in a rented accommodation in another (e.g., due to work), you can claim HRA benefits and home loan tax deductions simultaneously, provided you meet certain conditions

Employer Doesn’t Have HRA Provision? You can Still Claim Tax Deduction

For the unversed, you can still claim tax deduction even if your employer doesn’t have HRA as a component in your salary break-up. You can claim HRA deduction under Section 80GG of the Income Tax Act.

However, to claim HRA from your employer or otherwise, you would need

• Rent receipts or rental agreements as proof.
• If the annual rent exceeds ₹1 lakh, the PAN of the landlord must be provided.

So, Which One Helps Save More Tax – HRA or Home Loan?

Home loans have the potential to help save more on taxes, especially because it offers tax deduction on both principal and the interest component. Also, if you’re self-employed, you won’t be able to claim HRA. That said, if you live in a rented house and don’t plan to purchase a property with home loan, you can opt for HRA deduction.