Buy your home vs. Rent a house? Home loan vs. HRA tax benefits? Don’t worry, I’ll help you decide

August 4, 2013Save Money

26 Comments

home loan vs. HRA

Buying a home is a huge decision that has significant implications on the rest of our life. It is one of major goals that we have in life that we seek to achieve as soon as possible. However, there is one opposing school of thought that believes that renting a house is a way smarter decision than buying a house. Let us examine both cases from various perspectives to decide which one is better.

Most of my readers are salaried individuals and hence, I will examine this from such an individual’s perspective where he does not have the money to buy a property with full down payment. He needs to go for a home loan.

Immediate payment required

Buying a house requires an immediate down payment of between Rs. 5 lac or above depending on price of the property. Renting a house requires an amount of Rs. 25000 or above as deposit.

Monthly outflow

Both cases require a monthly outflow from your income. EMI in case of owned house and rent in case of rented house. However, for any property, EMI typically tends to be higher than rent. Off course EMI depends on the amount of down payment and various other factors. But to simplify the comparison, I am considering general, most prevalent cases.

Asset Creation

This is by far the biggest difference between the two. In both cases, you end up making monthly payments, but in case of owned property, after you’ve paid all your EMIs, the property will fully belong to you. You have created an asset. This asset acts as a security for you. Roti, Kapda, Makaan me se Makaan waali security. You will always have chhat (ceiling) on your head even if you lose your job! This property can be reverse mortgaged in your old-age to generate income after your retirement.

Whereas, in case of rent, even after paying rent for 30 years, you have no claim on the property! You end up building no asset after paying for so many years. Not a happy situation to be in. You’ll need to pay rent even after retirement!

Freedom of movement

This is the point use to counter the above point. When you buy a house, you end up getting stuck in that area/city/state/country. There is a hesitation to move to a new city even if it means better prospects in terms of your career. One of my experienced clients once gave me this lesson about why not to buy your home as it impacts your career growth.

People with rented house are free to move to any new city where they see better opportunities. In fact such people are free to change homes even within the same city when they change jobs. They can always rent a home close to their new office and save on traveling time and cost.

Tax Implications

People taking housing loan to buy a house as well as those paying rent for their house can claim tax deduction on their expenses.

Tax deductions for a home loan

Let’s first take a look at tax benefits that can be claimed on home loan. There are two parts to a home loan EMI – Principal part and Interest part.

Deduction of principal part of EMI under sec. 80C

Deduction can be claimed under section 80C of Income Tax Act for the principal amount of EMI paid during the year. Maximum deduction that can be claimed under this section is Rs. 1,00,000 per annum.

Deduction of interest part of EMI under sec. 24

For the interest part of your EMI, you can claim deduction under section 24 of Income Tax Act. Under this section you can claim a deduction of maximum Rs. 1,50,000/- per annum.

Deduction of interest part of EMI for ‘First time home buyers’ under sec. 80EE

People taking a home loan for their first property can claim an additional deduction of Rs. 1,00,000 on the interest part of their EMI. To qualify for this deduction, the following conditions need to be met:

  1. You should be buying your first property
  2. The loan should be sanctioned between 1st April 2013 to 31st March 2014
  3. Value of the residential property should not exceed Rs. 40,00,000
  4. Loan amount sanctioned should not be more than Rs. 25,00,000

Some other important points about home loan:

You can claim deduction under sec. 24 on interest payment for your second (or third, fourth..) property. In this case, there is no cap of Rs. 1,50,000 per annum. You can claim deduction on entire interest part of your EMI. However, the deduction on principal part (under sec. 80C) is not available in this case.

If you have an owned house but need to stay in a rented house in another city because of your job, you can still claim all deductions on your home loan – both principal part under sec. 80C and interest part under sec. 24.

To summarise tax deductions for home loan:

Income Tax Section

EMI Part

Self Occupied Property

Non-self Occupied Property

Sec. 80C

Principal

1,00,000

1,00,000

Sec. 24

Interest

1,50,000

No limit

Sec. 80EE

Interest

1,00,000

1,00,000

Having looked at tax calculations for housing loan, now lets look at tax deductions for those paying rent for their homes.

Tax exemption on rent payments – HRA

Tax exemption on rent payments can be claimed under Housing Rent Allowance part of your salary under sec. 10(13A) of Income Tax Act.

The amount that you can claim as deduction should be the minimum of following three amounts:

  1. Actual house rent allowance received in your salary
  2. 50% of the ‘Basic’ + ‘Dearness Allowance’ component of your salary
  3. Actual rent paid minus 10% of the ‘Basic’ + ‘Dearness Allowance’ component of your salary

You cannot claim exemption under HRA if you are not paying rent – meaning if you are staying in your own house.

Wow, when I started writing this article, I did not expect it to be so long! Three cheers to you if you have hung on and read so far! I hope I have given you all the necessary information to help you decide whether to go for your own home or stay in a rented house. Do let me know if I have missed any perspective that can be helpful in making this big decision. As always, I welcome your thoughts, comments, praises and brick-bats in the comments section below 😉

And lastly, if you have found this article helpful, do share it on Facebook, Twitter, Google+ or any social network of your choice and make me happy 🙂

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About Naimisha Parekh

Online shopping addict, personal finance advisor, mother and a loving wife :)


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26 Responses to “Buy your home vs. Rent a house? Home loan vs. HRA tax benefits? Don’t worry, I’ll help you decide”

  • Prathamesh August 4, 20134:07 pm

    It’s been a long time since you wrote your last article. I have been patiently waiting. And my patience has been duly rewarded 🙂

    This is such a comprehensive article and you’ve explained the taxation part of it so well. This has been really helpful.

    By the way, I believe in owning a property and not renting it. Old school 🙂

    • Naimisha August 4, 20134:11 pm

      Hey Prathamesh, it’s been less than an hour that I have written this article and you’ve already read it! Thank you for your kind words and being a loyal follower of my blog 😉

      I also live in my own house but I do accept that the other school of thought do have their fair reasons.

  • Divya August 4, 20134:27 pm

    When you are renting a house, you are at the mercy of the house owner. He can ask you to leave whenever he wants. I stay in a rented apartment; out of compulsion and not by choice 🙁

    But thanks for another useful article Naimisha!

    • Naimisha August 4, 20134:29 pm

      Ya agreed Divya, but staying in rented apartment has its own benefits as well. So cheer up 🙂

  • Sidharth August 14, 20133:33 pm

    Great article!!! I would agree with Prathamesh fully on both points i.e. your article’s awesomeness and preference to owning a house.

    • Naimisha August 14, 20138:24 pm

      Kind words Sidharth, as always! These words keep pushing me to write more.

      Thank you 🙂

  • David Lobo August 14, 20138:53 pm

    Your article WOW, way to go

    Thanks and my best.

  • Pramod Deshpande August 14, 201311:51 pm

    Good article indeed. Looks like addressed to only young people who have 30 years of job/career left. This is a major motivational factor in an individual’s life to live for! After all from adhyatmic point of view your purpose on this planet earth is NOT Roti, Kapda aur Makaan. Every atman has come to this earth with a purpose to achieve and roti, kapda aur makan are mere supportives for this perishable body to survive. But unfortunately we all have lost into only this Roti Kapda aur Makaan. Till death we keep on talking and discussing only about BHKs forgetting main purpose of life. Craving and aversion (as mentioned about devils madhu and kaitabh in Durga saptashati.) are the devils of modern life. All the best.

    • Naimisha August 15, 201310:41 am

      Pramodji, I agree with your observations. In order to achieve our purpose in life, we need to take care of basic necessities to survive. Roti, kapda and makaan are such basic necessities. The challenge is that in today’s world, just getting these basic necessities is a lifelong struggle in itself. People have hardly any time left in their lives by the time they achieve these.

      The idea of not owning a house but renting has a connection, in a small way, to your point.

      Thank you Pramodji, for taking time to write such a long comment and presenting everyone here with another perspective 🙂

      • Pramod Deshpande August 15, 201312:07 pm

        Thanks for excellent matured response. I am impressed. God bless you.

  • Bipin August 15, 201311:29 am

    I was expecting a more deeper thoughts and comparison between the two.
    I would value this 1 out of 5.

    • Naimisha August 15, 201311:31 am

      Sorry to have disappointed you Bipin 🙁

      Why don’t you add your views to take this article fromm 1/5 to 5/5. I’d be really grateful 🙂

  • hemang August 15, 20132:09 pm

    good coverage of tax implications.
    I believe that rent vs buy will depend on expected increase in property price compared to Risk free return the down payment amount can earn.

    Makaan.com publishes an excellent monthly/quarterly analysis on similiar parameters
    Acc to them,it is better to rent than buy in Mumbai. It is a function of rentals as a % of property value.

    • Naimisha August 15, 20133:09 pm

      I agree, Hemang. Thats an interesting angle i missed. Do you want to take a shot at explaining it in detail?

  • R RUPAREL August 19, 20139:56 pm

    The article is good comparision between rented and qwned homesas well as hra and h.l.But on 1 point you have given more stress i.e. freedom of movement.there are many other factors like children’s edu. social and environmental situation of the centre are requires consideration before changing city or location and not only the qwnership of the house

    • Naimisha August 20, 201310:04 am

      Hey Ramesh, I agree with the points you have put forward. I’ll add these points to the above article soon.

      Thank you for contributing 🙂

  • Manpreet Bhatia February 4, 20149:01 pm

    I still have not got the possession of the flat that I have bought (wont get it for the another 2 years!). Can I still get these tax benefits on the home loan I am paying ?

    • Naimisha February 5, 201411:20 am

      You can claim tax benefit in five equal yearly installments after you get possesion.

  • Deepak February 23, 20141:56 pm

    I understand that interests paid before possiossion can be claimed in five equal annual instalments after possession is taken. Let’s assume that this annual amount is INR 2.5 Lacs. Suppose there is still an interest of 1.2 Lacs that you have paid after the year of taking possession, then, Can you take a claim of 2.5 Lacs area portion plus 1.2 Lacs if current year interest, totalling to 3.7 Lacs of Tax rebate in the year?

    I am still staying in my same new house for which I am referring for the home loan here, and not in rented house.

    please advise.

    Thanks

  • MANISH March 3, 20149:45 am

    I am not clear on this point, could you please let me know more about the same.

    As per my understanding on reading this blog, if a person owns second/third property (in which he is not living) he can get exemption on the interest (no limit) paid. Is this understanding correct?

    I also want to know if the possession of the property should be completed OR this interest exemption can be available even if the flat is under construction?

    • Naimisha March 23, 20141:08 pm

      Manish, my answers below:

      1. Yes

      2. In case you take a loan on property whose possession is not given yet, you cannot claim exemption immediately. You can do so only after you receive possession. You can club all the interest amount you paid before getting possession and claim it over 5 years immediately after you receive possession (in 5 equal installments).

      Hope I have cleared your doubts.

  • Kris March 16, 201712:53 pm

    Good Article Naimisha, people on net are always interested to know how they can save their hard earned penny which the government capitalizes under various sections which are written in green generally so a common man realizes you could only save a penny or two from what you have earned finally. Weird but true that despite every effort the big brains have earned over others’ income and have been enjoying their rewards to having designed such unlawful laws. Not out of frustration but we have to live life with struggle and challenges every moment yet strive to develop India and its so called leaders. I have enjoyed reading your article and will look forward to some more

    • Kris March 16, 201712:56 pm

      “sections which are written in greeK”
      That was Greek!

 
 

26 Responses to "Buy your home vs. Rent a house? Home loan vs. HRA tax benefits? Don’t worry, I’ll help you decide"

 

 
 
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