HRA vs Own House Living – Detailed Reviews

There are a few people I know who despite being based in Gurgaon do not want to buy a house in Gurgaon. They would rather buy it elsewhere as an investment and continue to live in a rented property, thanks to skyrocketing prices of real estate in Gurgaon. The dynamics have changed and times seem to favour living on rent as opposed to living in a self-occupied property. Many wonder if continuing to live on rent and availing house rent allowance (HRA) is better or living in an owned (self-occupied) property. Let’s assess three scenarios.

Availing HRA

In the first case, say, HRA is given by the employer to an employee to meet the expenses with respect to rent paid by her for accommodation taken for the purpose of residence. The HRA paid by the employer is taxable under the head “income from salary” to the extent it is not exempt under section 10(13A). Now, let’s understand how to arrive at taxable part and the tax-exempt part of HRA. Exemption with respect to house rent allowance is regulated by rule 2A.
The least of the following is exempt from tax and the balance part of HRA is taxable in the hands of an employee—the actual amount of HRA received by the employee for the period for which the rented accommodation was occupied by the employee; an amount equal to 50% of the salary if the residential house is located in Mumbai, Delhi, Kolkata, or Chennai or 40% of the salary if the residential house is located at any other place; rent paid in excess of 10% of the salary.
Note that salary here is defined as basic salary, dearness allowance and any commissions based on fixed percentage of turnover achieved by the employee. One must check with her employer what forms the part of salary that is used to calculate the taxable and the tax-exempt part of HRA.
In order to avail the benefit, the employee must not own the property for which she is paying the rent, receive HRA as part of her salary income subject to tax and actually pay rent for the property she has occupied.
Let’s take Ajay Batra’s example. He is employed with a multinational company in Gurgaon. He has rented a house in Gurgaon where he lives with his family. He pays a rent of Rs.40,000 per month.
He receives a monthly basic salary of Rs.1,20,000, dearness allowance of Rs.10,000 and commissions of about Rs.25,000 per month. He is given an HRA of Rs.60,000 per month. Applying rule 2A stated above, the least of the following is exempted—Rs.60,000 (HRA received), Rs.62,000 (40% of Rs.1,55,000), or Rs.24,500 (rent paid less 10% of Rs.1,55,000).
Thus only Rs.24,500 of HRA received is exempt from tax. The balance is taxable. So in the given financial year, Ajay will have Rs.2,94,000 (Rs.24,500×12) exempt from tax.

Living in a self-occupied house with a home loan

In this case, the person has taken a home loan to acquire and/or construct a house property that he lives in. Here the person can claim tax benefits. Any interest paid towards home loan is treated as “expense” under “income from house property” and can be claimed under section 24(b). If the house is self-occupied, the maximum limit under section 24(b) is Rs.1.50 lakh and the assessee does not actually have to live in that house to claim the benefit. However, if the house is let out, there is no such limit. In other words the entire interest part can be claimed as a deduction under section 24(b). In the example of Ajay Batra above, if Ajay chooses to not rent a property but instead buy one for self use and avail a home loan paying a monthly instalment of Rs.40,000, then only Rs.1,50,000 will be exempted from tax under section 24(b), assuming Rs.1,50,000 or more is paid towards the interest payment on home loan.

Living in a self-occupied house without a home loan

If Ajay had been living in a self-occupied house where he did not take any home loan to acquire it, then he is not entitled for HRA and the entire HRA amount of Rs.7.2 lakh is taxable. And since there is no home loan, he can’t use section 24(b) to save Rs.1,50,000 from taxes.
What should you do
For any employee who is unsure whether to lease or buy a property he needs to apply the calculations shown above to arrive at a decision that makes sense for her. No doubt owning a real estate provides emotional security especially to the first time home buyer but for anyone who is looking for tax advantages to build her wealth, living on rent and availing HRA is a clear winner provided the calculations above support that.
The cash that is exempted from taxes can be invested systematically in other asset classes to help achieve any financial goals of the individual. One must consult her financial planner to assess the situation to rent or to buy. The planner will assess holistically in light of the financial goals. There are few other variables—age, her risk profile, asset allocation and real estate market data on rentals and capital values of the chosen area—that will play a crucial role before the decision is made.

Source: http://www.livemint.com/Money/TKJ4lLXbTDHg3CIc0xR2KN/Should-you-avail-HRA-or-live-in-a-selfoccupied-property.html