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In this week’s entry, I will attempt to present a new perspective to the whole rent vs. buy a house debate. Let’s put the spotlight on some of the basic math you need to keep in mind when making this decision.

Renting

 Buying
What you will pay for

Rent

 At the time of purchase:

  • Down payment,registration costs and loan processing fees
  • Over the years: Loan EMIs (principal and interest)
  • Always: Maintenance and home insurance
What tax benefits you can receive You can claim tax exemption for house rent allowance (HRA) under Section 10(13A) of the Income Tax Act. The lower of the following three options is taken as the HRA amount:

  • Actual house rent allowance received from your employer
  • Actual house rent paid by you minus 10% of your basic salary
  • 50% of your basic salary if you live in a metro or 40% of your basic salary if you live in a non-metro
  • You can claim deduction for the interest paid on home loan under Section 24 up to Rs 2 lakh for a self-occupied house. If the house is let out, deduction for the entire interest paid on home loan is available.
  • You can also deduct principal repayment on home loan from the gross total income under Section 80C of the Income Tax Act, 1961 (subject to an overall cap of Rs 1.5 lakh).
  • If you are constructing your house, then interest paid on home loan during the pre-construction period can also be claimed as deduction.
  • If you have bought a house and took a loan jointly with someone, each co-owner can avail deduction for interest paid on home loan. Note: a joint owner, who is not a joint borrower, is not entitled to tax benefit and vice versa.
How you can build an investment You can use place money (that could have been used for down payment on a house) in investment and savings products, such as insurance, mutual funds, and more. Your house is the biggest investment as its value will also appreciate gradually. You can leverage upon this investment by:

  • Selling off the property and regaining equity
  • Not paying EMIs once the loan is over
What you stand to lose in this investment The money you pay for rent is basically lost. Further, if you do not invest your extra money wisely, you stand to lose your savings! It’s possible to commit the following mistakes:

  • Buy an overpriced house
  • Take loan that is not feasible for you to pay off
  • Choose home loan plan poorly and pay more interest
What you stand to gain in this investment
  • Easier to move if you choose to relocate
  • No money spent on maintenance
  • If your rent is low, it is a better investment than buying a house
  • Quick access to cash for investments
  • Satisfaction of being a homeowner
  • Constant EMI whereas rent will definitely increase every year
  • You build a huge asset primarily on bank’s money but reap revenues solely!
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If the above table still didn’t answer all your questions and you are still thinking of buying a home, you should ask yourself the following questions:

  1. Do you plan to stay in your current city for a long term (more than 5 years)?
  2. Have you calculated what your EMI could be if you were to purchase a house? Does this EMI fit your budget?
  3. What is your current rent to capital ratio?
  4. What is the estimated annual increase in the value of the property you plan to buy?

If you have the answer to the last question, then the puzzle has been solved.

This Article was Originally Published in The Business Insider.
By Naveen Kukreja, Director, PaisaBazaar.com

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