HRA and Tax Benefits from Home Loans?

In our previous post, we had discussed about how you can avail HRA and tax can be exempted in your property. We shall now understand this with the help of the following example:

Consider an employee who resides in Mumbai. He pays rent of Rs. 20,000 per month and his salary is divided into the following components:

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• Basic pay: Rs. 50,000 per month
• Dearness Allowance or DA is Nil.
• HRA is Rs. 20,000 per month which is 40% of the Basic Pay

The exempted amount of HRA from the above mentioned details will be the least from these figures where HRA is Rs. 20,000, Rent above 10% of Basic= Rs. 15,000 (20000-5000) and 50% of the Basic Pay= Rs. 25, 000.

Out of these the least is that of the Rent above 10% of Basic i.e. Rs. 15,000. And hence, in this example, the person can avail HRA tax exemption of Rs. 15,000 per month out of the total HRA that is Rs. 20,000 per month.

Therefore, the net taxable portion of the HRA would only be Rs. 60,000 per year.

Net taxable portion of the HRA = Total HRA received per year – HRA tax exempted per year

It is important to note that the house rent allowance can be claimed if the following conditions are fulfilled:

• The person is an employee and is salaried
• He/she receives HRA as a part of his salary
• He/she is not a resident of the same city where he/she has his property
• He/she pays the rent of the house that he is staying in as a tenant and has a valid agreement of the same

The HRA tax exemption is done based on monthly or yearly basis depending upon whether the above mentioned clauses remain same throughout the year or vary during the year.

Read More:
1) Confused how home loans can get you Tax benefits?
2) Understanding EMI calculations
3) EMI: Evaluate, Manage and Impliment?

Understanding EMI calculations

Have a property in mind and have planned to opt for a home loan for the same?

As spoken in our previous blog, Equated Monthly Installment is more about Evaluation, Management and Implementation of the research you carry out before opting for a home loan. Post the research having a complete understanding about the calculation of EMI is important.  To begin with, let us understand what EMI stands for.

EMI or Equated Monthly Installment is described by the Investopedia as “ a fixed payment amount made by a borrower to a lender at a specified date each calendar month. Equated monthly installments are used to pay off both the interest and the principal each month, so that over a specified number of years, the loan is paid off in full.”

Surely, this definition is self explanatory, however, we shall have an in depth understanding about EMI with the help of an example in the latter part of the blog.

From the definition we can arrive at an understanding that when a borrower borrows money, he is entitled to make a certain fixed amount of payment to the lender periodically for several years so as to complete he loan repayment. This loan repayment can differ from one payment scheme to another, depending on the comfort of the borrower to repay the loan over a certain period of time which may be short or long term. 

One of the main benefits of paying EMI for the borrower is that he is well informed about the amount he needs to pay to the lender every month, making his budgeting process easier.

The formula for EMI (in arrears) is:

or, equivalently,

Where: 

• P is the principal amount borrowed, 

• A is the periodic amortization payment, 

• r is the periodic interest rate divided by 100 (annual interest rate also divided by 12 in case of monthly installments), and

• n is the total number of payments (for a 30-year loan with monthly payments n = 30 × 12 = 360).

Consider an example, a person takes a loan of 20,00,000 units of currency from the bank at 10.5% annual interest of 10 years (120 months), then the EMI can be calculated equating the mentioned details in the equation stated above in the following way:

EMI = 

Units of currency 20,00,000 * 0.00875 * (1 + 0.00875)^120 / ((1 + 0.00875)^120 – 1)= Units of currency 26,987.00

Hence, the person will be paying 26,987.00 units of currency for 120 months to completely repay the loan taken from the bank. The total amount that he would be paying will sum up to 26,987*120= 32,38,440.00 units of currency. This includes 12,38,440 units of currency as the interest paid towards the loan.

EMI: Evaluate, Manage and Implement?

Have you opted for a home loan? Are you aware of the EMI that is applicable for the home loan you have opted for at a certain rate of interest?

Calculating EMI is not a mammoth task but is a very crucial step when it comes to payment of the loan that you have opted for!  Don’t you think EMI can be planned and evaluated with a well managed strategy to make loan payment easier?

Well! That is what we are speaking about today!

EMI –Equated Monthly Installment or EVALUATE, MANAGE, IMPLEMENT?

Evaluating the loan amount can be helpful in understanding the amount that needs to be repaid. A proper evaluation can give you a complete detailed information regarding the cycle of EMI for your home loan.

Managing the loan amount includes the steps for obtaining a maximum amount as loan for the property value as the home loan is a long term loan that is taken by customers at floating rates. Home loan is one of the biggest financial commitments that we make in our lives and hence, we need to be as aware and structured as possible while we opt for the loan and while we repay the loan amount.

Implementation of the strategy like opting for  long term loan that can reduce your EMI amount,   to repay the loan amount should also be considered while loan repayment. Proper evaluation, management and implementation is required. This can be done via extensive research about banks that are offering loans at different rate of interests and the duration of the time for their payment of the same.

If you are thinking of applying for a home loan, the below mentioned link can help you find out the EMI that you would be paying for the amount you have opted as a home loan.

EMI Calculator

Do let us know if you are stuck anywhere in calculating the EMI of the loan you are planning to opt for.

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