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Renting offers flexibility, lower costs, and tax benefits. Buying builds an asset with home loan tax benefits but has high initial costs and long-term commitment
A house represents more than just a physical space; it also carries significant emotional value. (News18 Hindi)
Is it more advantageous to rent a home or purchase one? Should one make a significant investment in buying a house through a mortgage when prices are elevated and capital appreciation in many areas is not as robust as it used to be? Wouldn’t it be simpler to rent a place close to work?
Buying property is often regarded as a secure and reliable investment. A home represents more than just a physical space; it also carries significant emotional value. Let’s examine the situation from a tax standpoint.
Renting a Property
Advantages
The main advantage of renting a property in terms of tax is the exemption for House Rent Allowance (HRA). For those whose salary doesn’t include HRA — like self-employed individuals or consultants — there’s a possibility of claiming a deduction of up to Rs 5,000 per month from their total taxable income under the traditional tax system. However, this exemption does not apply to those who select the new tax regime. An exemption is applicable on whichever comes out to be the lowest of the following:
- When rent is less than 10% of the salary (basic salary and DA)
- 50% of salary if a house is in Delhi, Mumbai, Kolkata or Chennai, 40% of salary in other cities
- Actual HRA availed
Other Benefits
- Rent can be less than home loan EMI
- More freedom in choice of location and type of home
- Can easily relocate to another area of the city
- Tax benefits available (under the old tax regime)
Disadvantages
- Rent does not become an asset, no matter how much it is
- Rent usually increases every year, increasing cash outflow
- No or limited scope for making structural changes
- May have to vacate on short notice
Purchasing a Property
Tax benefits are available only under the traditional tax framework. When you take a mortgage to buy a home, the monthly payment (EMI) typically consists of two components – one portion that goes towards repaying the principal (the loan amount received) and the other that covers the interest (the cost incurred for borrowing).
Principal Repayment
Under the traditional tax system, a deduction is available under section 80C for a maximum of Rs 1.5 lakh. Within this limit, deductions can be made for principal repayment, stamp duty, registration fees, and other costs related to the transfer of property.
Interest Payment
Three conditions must be met: the home is lived in, unoccupied, or rented out. According to the traditional tax framework, a deduction of up to Rs 2 lakh annually on interest paid for a home loan is permitted for an owner-occupied property. This can offset any other earned income. The same regulations apply even if the home remains unoccupied. For rented properties, you can claim deductions not just for the interest on the mortgage but also for municipal taxes paid and a standard deduction of 30% of rental income.
Offsetting Losses
If you have a self-occupied residence purchased with a mortgage, it implies that you are not earning rental income from it. Thus, the interest paid on the mortgage will count as a loss. Losses up to Rs 2 lakh from property (whether self-occupied or rented out) can be set against any other income, such as salary or income from various sources, within a financial year. Any losses exceeding Rs 2 lakh can be carried forward for up to eight subsequent assessment years, but they can only be set off against ‘income from property.’
Notional Rent
The notion of notional rent comes into play when an individual owns three or more properties. In such situations, two of the properties are deemed self-occupied (without any conditions as per the 2025 budget proposals), while the remaining are classified as ‘deemed rented’. This classification is based on the anticipated market rent and becomes subject to taxation.
Advantages
- A house is an asset and the EMI goes towards building this asset.
- Tax benefits on home loans
Disadvantages
- Heavy costs like down payment and registration, followed by property taxes and repairs.
- House properties are illiquid as they cannot be sold quickly.
- Property prices fluctuate and may not give the expected returns.
- EMIs have to be paid regularly.
