As a taxpayer, it’s important to think about different ways to save on taxes so you can pay less in taxes and have more money to spend. One of the common ways to save taxes is by taking deductions on your home loan or HRA (House Rent Allowance). In this blog, we will compare both of these options and see which one offers the highest tax savings.
What is a Home Loan?
A home loan is a loan availed by an individual for the purpose of purchasing a house or flat. The loan is provided by a financial institution such as a bank or housing finance company and is usually repaid over a period of time through monthly installments. The interest paid on a home loan is eligible for tax deductions under Section 24 of the Income Tax Act.
What is HRA?
HRA is a component of your salary that is paid by your employer to cover the cost of your rent. If you are living in a rented house, you can claim a tax deduction on the HRA component of your salary. The HRA deduction is available only if you are staying in a rented house and paying rent for the same.
For example, if you are working for a corporate company and want to claim a HRA, so you need to submit a copy of your rent agreement mendatory for HRA.
Home Loan vs HRA: Comparison
Now that we have a basic understanding of home loans and HRA, let’s compare the two options to see which one offers the highest tax savings.
Eligibility: In order to avail yourself of tax deductions on a home loan, you must be the owner of the house or flat for which the loan has been taken. On the other hand, HRA deductions are available to individuals who are staying in a rented house and paying rent for the same. The benefits of a home loan, however, outweigh HRA in a lot of ways.
Deductions available: The deductions available on a home loan are higher as compared to HRA. Under section 24, you can claim a deduction of up to Rs. 2 lakhs on the interest paid on a home loan. In addition, you can also claim a deduction of up to Rs. 1.5 lakhs under section 80C for the principal repayment of the loan. On the other hand, the maximum deduction available on HRA is the least of the following:
- Actual HRA received
- Rent paid minus 10% of your basic salary
- 50% of your basic salary (if you are living in a metro city) or 40% of your basic salary (if you are living in a non-metro city)
Read on if you don’t have HRA and want to know how to apply for house rent allowance.
Tax savings: As the deductions available on a home loan are higher as compared to HRA, the tax savings are also higher. In addition, the tax savings on a home loan increase with the increase in the interest rate, as the interest component becomes higher. On the other hand, the tax savings on HRA remain constant, as the deduction is based on a fixed percentage of your basic salary.
Other benefits: In addition to tax savings, availing of a home loan also has other benefits, such as the ability to purchase a house that you might not have been able to afford otherwise, and building equity in the property. On the other hand, HRA does not provide any additional benefits apart from tax savings.
How to Apply for House rent Allowance?
Conclusion
In conclusion, availing a home loan offers higher tax savings as compared to HRA. However, the final decision should be based on your individual circumstances and financial goals. If you are planning to purchase a house, availing a home loan and claiming the deductions can help you save on taxes while also building equity in the property. On the other hand, if you are staying in a rented house and paying rent, availing HRA deductions can help you save on taxes. It is always a good idea to consult a financial advisor or tax expert before making any decisions related
Written by Rashmi Khanna
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