HRA vs Home Loan Tax Benefits: Which Saves You More Money in India?
Should you rent and claim HRA, or buy a home and claim loan benefits? We ran the numbers across different salary levels and cities to find out.
Should you rent and claim HRA, or buy a home and claim loan benefits? We ran the numbers across different salary levels and cities to find out which option actually saves more tax.
Use our Salary Calculator to see your exact take-home after tax deductions.
The Two Paths
Path 1: Rent and Claim HRA
- House Rent Allowance reduces your taxable income
- No EMI burden, more flexibility
- No asset building
Path 2: Buy and Claim Home Loan Benefits
- Section 24(b): Up to Rs 2 lakh deduction on interest
- Section 80C: Up to Rs 1.5 lakh deduction on principal
- Asset building, but locked into EMI
HRA Tax Benefit Calculation
HRA exemption is the MINIMUM of:
- Actual HRA received
- 50% of basic salary (metro) or 40% (non-metro)
- Rent paid minus 10% of basic salary
Example: Rs 15 LPA Salary in Bangalore
| Component | Amount |
|---|---|
| Basic Salary | Rs 6,00,000 |
| HRA Received | Rs 3,00,000 |
| Rent Paid | Rs 25,000/month = Rs 3,00,000/year |
HRA Calculation:
- Actual HRA: Rs 3,00,000
- 50% of Basic (metro): Rs 3,00,000
- Rent - 10% Basic: Rs 3,00,000 - Rs 60,000 = Rs 2,40,000
Exemption = Rs 2,40,000 (lowest of three)
Tax Saved (30% bracket): Rs 72,000/year
Home Loan Tax Benefits
Section 24(b) - Interest Deduction
- Maximum: Rs 2,00,000 per year for self-occupied property
- Actual interest paid if less than Rs 2 lakh
Section 80C - Principal Deduction
- Maximum: Rs 1,50,000 per year
- Shared with other 80C investments (EPF, insurance, etc.)
Example: Rs 80 Lakh Loan at 8.5% for 20 years
Year 1 Interest: ~Rs 6,70,000 (only Rs 2,00,000 deductible) Year 1 Principal: ~Rs 1,20,000
| Deduction | Amount | Tax Saved (30%) |
|---|---|---|
| Section 24(b) | Rs 2,00,000 | Rs 60,000 |
| Section 80C | Rs 1,20,000 | Rs 36,000 |
| Total | Rs 3,20,000 | Rs 96,000 |
Head-to-Head Comparison
Scenario 1: Rs 12 LPA in Non-Metro City
| Option | Annual Tax Benefit | Monthly Savings |
|---|---|---|
| Renting (Rs 15k rent) | Rs 43,200 | Rs 3,600 |
| Home Loan (Rs 50L loan) | Rs 72,000 | Rs 6,000 |
| Winner | Home Loan | +Rs 2,400/month |
Scenario 2: Rs 25 LPA in Mumbai
| Option | Annual Tax Benefit | Monthly Savings |
|---|---|---|
| Renting (Rs 45k rent) | Rs 1,08,000 | Rs 9,000 |
| Home Loan (Rs 1 Cr loan) | Rs 96,000 | Rs 8,000 |
| Winner | Renting | +Rs 1,000/month |
Scenario 3: Rs 40 LPA in Bangalore
| Option | Annual Tax Benefit | Monthly Savings |
|---|---|---|
| Renting (Rs 60k rent) | Rs 1,26,000 | Rs 10,500 |
| Home Loan (Rs 1.2 Cr loan) | Rs 1,05,000 | Rs 8,750 |
| Winner | Renting | +Rs 1,750/month |
The Hidden Factors
Why Renting Often Wins on Tax
- HRA scales with rent: Higher rent = higher deduction (up to limits)
- No 80C competition: Home loan principal competes with EPF, insurance
- Flexibility: Can optimize by choosing rent amount
Why Home Loan Wins Long-Term
- Asset building: EMI goes toward ownership
- Appreciation: Property value typically grows 5-8% per year
- Rental income potential: Future passive income
- Fixed cost: EMI stays same while rent increases
The Real Calculation: 10-Year View
Renting for 10 Years (Rs 30k/month, 5% annual increase)
| Year | Annual Rent | Tax Saved | Net Cost |
|---|---|---|---|
| 1 | Rs 3,60,000 | Rs 72,000 | Rs 2,88,000 |
| 5 | Rs 4,38,000 | Rs 87,600 | Rs 3,50,400 |
| 10 | Rs 5,58,000 | Rs 1,11,600 | Rs 4,46,400 |
| Total | Rs 46,30,000 | Rs 9,26,000 | Rs 37,04,000 |
End result: Rs 0 assets
Buying Rs 80L Property (20% down, 8.5% loan)
| Year | EMI Paid | Tax Saved | Net Cost |
|---|---|---|---|
| 1 | Rs 6,24,000 | Rs 96,000 | Rs 5,28,000 |
| 5 | Rs 6,24,000 | Rs 84,000 | Rs 5,40,000 |
| 10 | Rs 6,24,000 | Rs 72,000 | Rs 5,52,000 |
| Total | Rs 62,40,000 | Rs 8,40,000 | Rs 54,00,000 |
End result: ~Rs 1.3 Cr property (at 5% appreciation), Rs 40L loan remaining
Net worth difference: ~Rs 90 lakh in favor of buying
New Tax Regime Consideration
The New Tax Regime (2023) offers lower tax rates but no HRA or home loan deductions.
| Old Regime | New Regime |
|---|---|
| Higher rates | Lower rates |
| HRA deduction | No HRA deduction |
| Home loan deductions | No deductions |
| Good for high deductions | Good for simple salary |
Impact: If you're in the new regime, the rent vs buy decision is purely financial, not tax-driven.
Calculate your take-home in both regimes
Decision Framework
Choose Renting If:
- You value flexibility (job changes, city moves)
- Property prices in your city are very high (>10x annual rent)
- You can invest the EMI-rent difference at 12%+ returns
- You're in a high tax bracket with good HRA
Choose Buying If:
- You plan to stay 7+ years in one location
- Property appreciation in your area is strong
- You want forced savings (EMI discipline)
- Rental yields in your area are reasonable (3%+)
The Bottom Line
Our calculations show:
- Short-term (1-5 years): Renting often saves more tax
- Long-term (10+ years): Buying typically builds more wealth
- Tax benefit alone should not drive the decision
The real question isn't "which saves more tax?" but "where do I want to be in 10 years?"
Calculate your exact take-home
This article is for informational purposes only and does not constitute financial or tax advice. Consult a qualified CA for advice specific to your situation.