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How can you save tax on HRA and home loan interest

Monday, August 05, 2013 by Rajiv Raj

hl106n6-Part1That is what Rahul Gopal, a Mumbai-based trader discovered when he felt his one bedroom house in suburbs of Mumbai was getting smaller as family grew bigger. "My wife was pregnant for second time. My elder son was growing up and we realized he needs a lot of space to run around. At the same time I found a good two bedroom house which came up for rent in my society. Then I started working out the math and was happy to discover that I could save a lot more on tax by moving into a rented house," said Gopal.

Gopal owned the one bedroom house he had lived in. He had taken a home loan on it and the outstanding amount stood at around Rs 4600000. He was paying around Rs 2.2 lakh as taxes per annum. "This was after getting a tax exemption on the home loan interest of up to Rs 1.5 lakh. But the interest I was paying was around Rs 4-5 lakh range," he said.

When considered moving into a two-bedroom apartment, he discovered that he could get tax exemption on HRA component of his salary and the entire interest he pays for his home loan, even if he let out his property and earned rent as an additional income.

"In my case the interest I pay is higher the rent I earn, so my CA said that effectively I am at a loss," he said. So by moving into a two bed room flat on rent he will be benefitting in the following ways:

  • Claim tax exemption on the rent being paid for his 2 bed room house under Section 10 (13A) Rule 2A of the IT Act.
  • Claim tax exemption for entire interest paid on the home loan for his one bedroom flat under section 24 of the IT Act.
  • Save a lot more in form of tax
  • Get a bigger house to live.
MadanRajiv Raj

Rajiv is a credit expert with 10 years of experience in personal finance and consumer banking industry and another 7 years in credit bureau sector. Rajiv was instrumental in setting up India’s first credit bureau, Credit Information Bureau (India) Limited (CIBIL). He has also worked with Citibank, Canara Bank, HDFC Bank, IDBI Bank and Experian in various capacities.

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