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Home Loan EMI vs Rent: What are the Tax Benefits? Research Team | Posted On Tuesday, January 21,2020, 05:36 PM

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Home Loan EMI vs Rent: What are the Tax Benefits?



Your residence gives you a lot of tax benefits. Be it owned, rented or leased, there are a lot of tax benefits. The repayment of home loan principal and home loan interest fetches tax benefits under Section 80C and Section 24 respectively. You also get tax breaks on the income paid to landlord.

Tax Benefits on Home Loan

There are a number of investments which enjoy the Section 80C tax benefit. The popular ones are PPF, ELSS, NSC, premiums paid on life insurance plans and even the home loan principal repayments. This is a collective deduction up to Rs 1.5 Lakhs a year.

The home loan principal is not sizeable during the initial years of repayment. This means the home loan principal alone would not exhaust the Section 80C limit. You need other tax saving investments like PPF and ELSS to exhaust the limit.

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Home Loan EMI vs Rent: What are the Tax Benefits?

Home Loan Interest Tax Benefits

You enjoy tax benefits on home loan interest up to Rs 2 Lakhs a year under Section 24(b) for self-occupied properties. If you own two properties and both of them are not let-out (given on rent), they both qualify to be self-occupied properties.

See Also: How to Select the Best Home Loan?

Your second house will not be subject to tax on the notional basis if it’s used as the family residence or even if it’s left vacant for the whole year. (Say you are employed at another location). If you avail of home loans to finance both the properties, the total home loan interest deduction is still Rs 2 Lakhs a year.

If you take a home loan for the under-construction property, you get tax benefits on home loan interest payments over 5 years. This starts from the year in which the construction was completed. Pre-construction interest can be claimed in 5 equal installments on a yearly basis. The maximum tax deduction on home loan interest is capped at Rs 2 Lakhs.

Home Loan Tax Benefits for First-Time Homebuyers

If you are buying a house for the first time, you get tax benefit on home loan interest payments under Section 80EEA. This deduction of Rs 1.5 Lakhs a year on home loan interest is over and above the Rs 2 Lakh deduction under Section 24.

The stamp duty on the property must not exceed Rs 45 Lakhs. If you meet all the conditions under Section 80EEA you can get a deduction on home loan interest up to a maximum of Rs 3.5 Lakhs a year. The home loan must be availed between 1st April 2019 to March 31st 2020 to get this benefit.

See Also: When To Switch Home Loan?

HRA Tax Exemption

If you get House Rent Allowance or HRA as part of the salary package, the amount is eligible for tax exemption under Section 10(13A).

The least of the three values is available as tax exemption:

  • The actual rent allowance your employer offers as part of the salary package in the relevant period.
  • Actual rent paid for the house less 10% of basic pay.
  • Its 50% of basic salary if you reside in a metro city. Its 40% for other cities.

Let’s understand this with an example. Vijay resides in Kolkata in a rented apartment paying Rs 20,000 a month. His Basic salary is Rs 36,000 and HRA is Rs 18,000. What is the HRA tax exemption?

See Also: 5 Tips to Improve Your Home Loan Eligibility

Based on the 3 conditions we have:

  • HRA provided by the Company is Rs 18,000 a month or 2,16,000 a year.
  • Actual rent paid less 10% of basic salary. The actual rent paid is Rs 20,000 a month or Rs 2,40,000 a year. This is Rs 2,40,000 – (10% of 2,16,000) = Rs 1,96,800.
  • He resides in Kolkata which is a metro city. This is 50% of basic salary which is 50% of Rs 4,32,000= Rs 2,16,000.

The least of the three conditions is Rs 1,96,800. This is the HRA tax exemption.

See Also: How to Select The Best Home Loan in India? What Should I Consider?

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