Want to save more on taxes without the stress? Whether you’re living in a rented house or paying off your own home, choosing the right option can make a big difference.
For middle-income families, tax savings matter a lot. Two common ways to save are through House Rent Allowance (HRA) and Home Loan benefits. But which one should you go for? To make the best choice, you need to understand the pros and cons of these options. This will help you make a better decision and enhance your tax savings.
Read today’s Brick & Bolt blog to understand HRA and home loans, their tax benefits, and which one suits you better.
What is HRA- House Rent Allowance?
House Rent Allowance is generally called HRA. An employer gives the employee this allowance to cover the cost of living in rented accommodation. HRA is often a part of an employee’s CTC plan. A maximum number of private and public employers pay HRA as one of the sub-components of their employees’ wages. The HRA amount for single employees is based on their salary structure, the city where they reside, and the actual rent paid.
Understanding HRA Tax Benefits
You can reduce your taxable income under Section 10(13A) of the Income Tax Act, 1961.
Section 10(13A) of the Income Tax Act, 1961
HRA can help you by reducing your taxable income by providing tax exemptions under this Income Tax Act.
The exemption for HRA benefits is the minimum of the following three conditions:
- The actual amount of HRA received
- If living in metro cities- 50% of your salary (Basic salary + Dearness Allowance), and if living in non-metro cities- 40%.
- Actual rent paid minus 10% of the (Basic salary + DA)
You can consider this example for HRA calculation:
If an employee earns ₹25,000 monthly in a metro city, receives ₹8,000 as HRA, and pays ₹10,000 in rent, the exemption will be calculated as follows:
Actual HRA received: (₹8,000 x 12) = ₹96,000
50% of salary: ((₹25,000 x 12) x 0.5) = ₹1,50,000
Excess of rent annually over 10% of basic salary: (₹150,000 – (0.1 x ₹25,000 x 12) = ₹1,20,000
In this case, the least amount exempt from tax would be ₹96,000
Therefore, you will receive an HRA of Rs 96,000 as an employee. That will be exempt from tax.
What is a Home Loan?
A home loan, or a housing loan, is a type of loan given by banks or financial institutions to help people buy, construct, or renovate a residential property. The loan is secured by the property itself, which serves as collateral.
Also Read: Home Loan Schemes In India-Benefits, Importance and Types
Understanding Home Loan Tax Benefits
If you take a home loan to buy a house, the loan amount will be directly paid to the seller or builder. You need to repay this loan amount through Equated Monthly Installments (EMIs) over a specified tenure, which includes both principal and interest payments.
You can also get the following benefits from the Income Tax Act, of 1961:
Section 24(b): Interest on Home Loan
Under Section 24(b) of the Income Tax Act, you can get a deduction of up to ₹2 lakh on the interest paid for self-occupied properties. If you rent out the house, there is no upper limit on how much interest you can claim. The recent Budget 2025 has proposed increasing this limit to ₹3 lakh, which will help home loan borrowers save more money by increasing the number of loan takers.
Section 80C: Principal Repayment
Under Section 80C of the Income Tax Act, you have the possibility to save tax on the money you repay for your home loan’s principal amount. You can get a tax deduction of up to ₹1.5 lakh on the principal repayment of home loans. However, you must keep the property for at least five years. If you sell it before five years, you will lose the tax benefits you claimed earlier.
Tax Deductions for First-Time Homebuyers
If you are a first-time homebuyer, then you can get extra benefits under Section 80EEA. It allows you to claim tax deductions of up to ₹1.5 lakh by purchasing an affordable house. This section rule will help new buyers by making homeownership more affordable.
To understand how different interest rates affect your EMI, use our home loan EMI calculator.
Comparison: HRA Vs Home Loan Tax Benefits
| HRA | Home Loan | |
| Eligibility Criteria | – Only for salaried employees paying rent. | – Available for property buyers/owners.- Co-borrowers must be co-owners. |
| Tax Deduction Limits | – Exemption: Minimum of:- Actual HRA received- 50% (metro) / 40% (non-metro) of salary- Rent paid – 10% of salary. | – Interest: Up to ₹2 lakh/year.– Principal: ₹1.5 lakh under Section 80C.- Additional ₹1.5 lakh for first-time buyers under Section 80EEA. |
| Long-Term Benefits | – No asset accumulation.- Benefits cease once renting stops.- Immediate tax relief. | – It builds equity through property ownership.- Potential appreciation in property value.- Tax benefits for up to 20 years. |
| Short-Term Benefits | – Immediate savings on taxable income.- Flexibility to relocate easily. | – Pre-construction interest deductions.- Reduced taxable income via EMIs. |
| Flexibility | – No ownership obligations.- Suitable for frequent job changes or relocations. | – Long-term commitment (15–30 years).- Higher EMI burden for shorter tenures. |
| Ownership | – No ownership rights.- Dependency on landlord agreements. | – Legal ownership of property.- Co-borrowers share ownership rights. |
HRA Vs Home Loan: Which Offers Better Tax Benefits?
Before making a decision between HRA and a home loan for tax savings, you need to consider the following factors:
- Consider your long-term goals and financial priorities. If owning a home is a preference and you have other ways to repay a home loan comfortably, then a home loan would be the favoured option.
- Assess the cost of renting versus the cost of owning a home. Compare the tax savings with HRA to the tax benefits of a home loan and determine which option offers greater financial advantages.
- Consider your future plans, such as potential job changes or relocations, as these factors may impact the suitability of HRA or home loan in the long run.
Tips to Maximize Tax Benefits
You can increase your tax benefits by strategic planning and understanding the available options. You can consider the following tips:
- If possible, try to get both HRA and home loan benefits where possible. This will help you optimize tax savings by utilizing both avenues simultaneously.
- Keep proper documents like rent agreements and home loan statements. These are needed to claim tax deductions.
- Plan your finances with long-term goals in mind. This will help you create a strong tax-saving plan.
Both tax-saving options have different advantages based on different criteria. Wisely choose based on your financial goals. Loan tax benefits will be the best option if you want property ownership and investment. If you are required to be flexible through renting due to job requirements, then go for HRA tax benefits.
Hemali Patel