When evaluating financial decisions such as renting versus buying a property, understanding the tax implications under the old tax regime is crucial. This analysis compares the tax savings from House Rent Allowance (HRA) exemptions for three rental scenarios ( ₹25,000, ₹35,000, and ₹50,000 monthly HRA) against the tax benefits of a home loan for a property valued at ₹1 crore with an ₹80 lakh loan. By calculating the exemptions and deductions available, we can assess how these tax savings align with the costs of renting versus buying, providing a clearer perspective on financial planning.
The exemption related to house rent allowance is provided u/s 10(13A) of the Income Tax Act, 1961, the manner of computation of such HRA is provided under rule 2A of the Income Tax Rules, 1962.
“As per these rules, the exemption related to HRA will be least of the following,” says Suresh Surana, a Mumbai-based chartered accountant.
- the actual HRA received; or
- actual rent paid (-) 10% of basic pay; or
- 50% of basic salary plus dearness allowance in case the assessee lives in a metro city such as Mumbai, Kolkata, Delhi or Chennai.
For each scenario, the annual HRA, 50% of basic salary ( ₹4.5 lakh, assuming a basic salary of ₹9 lakh), rent paid (equal to HRA), and 10% of basic salary ( ₹90,000) are considered.
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“The exemption is the least of these values: ₹2.1 lakh for Option 1 (HRA ₹25,000), ₹3.3 lakh for Option 2 (HRA ₹35,000), and ₹4.5 lakh for Option 3 (HRA ₹50,000, capped at 50% of basic). The corresponding tax savings, calculated at 31.2% (30% + 4% cess), are ₹65,520, ₹1,02,960, and ₹1,40,400 respectively,’ says Surana.