Prospective home buyers may face dilemma in deciding if it would be a financially prudent decision to buy a property or to keep on staying in a rented accommodation under the new income tax regime, as there are no tax benefits either on House Rent Allowance (HRA) or on home loan interest and principal repayment.
Without any tax benefit, it would be easier to compare the decisions of either buying a house or staying on rent financially. However, comparison would only be effective if the amounts saved by postponing the decision to buy a house is fully invested to accumulate a corpus to buy a piece of property later.
Let us assume that the price of the flat that Shyam Dubey (name changed) was planning to buy is Rs 50 lakh and registration charges, stamp duty etc would be Rs 5 lakh. Apart from paying the down payment Rs 10 lakh and stamp duty etc of Rs 5 lakh from his own fund, Shyam would need to take home loan of Rs 40 lakh for 20 years, EMI of which would be Rs 40,000.
Assuming the rate of inflation in the residential flat as 10 per cent, the effective value of the flat after 20 years would be around Rs 3,36,37,500. Also, Shayam would have to spend Rs 40,000 as annual maintenance cost. So, he would have to spend Rs 8 lakh in 20 years to keep the flat in good condition. Hence, the effective value of the flat after 20 years would be Rs 3,28,37,500.
Currently, he pays rent of Rs 20,000 per month and by postponing the house purchase, he may save the amount to be paid on down payment, registration charges and stamp duty and may invest Rs 15 lakh lump sum in a equity mutual fund (MF) scheme for 20 years and may start a monthly Systematic Invest Plan (SIP) of Rs 20,000 as well by saving the extra amount over the monthly rent, which he otherwise would have to pay for EMI. The rise in house rent over time would be compensated through increments in his salary and he would be able to save and invest Rs 20,000 per month.
Assuming a Compound Annual Growth Rate (CAGR) of 12 per cent, the value of his investment after 20 years would be Rs 3,28,66,586.
So, in the above mentioned scenario, buying a flat and staying on rent would of little difference financially.
However, he would be saved from the hassle of shifting rented accommodation if he buys his own flat.
On the other hand, staying on rent would be beneficial, if he is able to save time and cost of commuting to his office by taking the rented accommodations near his office or in case of migrating to other cities for better job opportunities.
The return on investment would also affect the decision. Lower return would make buying a house profitable, while higher return on investment would make postponing the buying decision gainful. For example, if the CAGR increases from 12 per cent to 15 per cent, the Shyam would get over Rs 5 crore (Rs 5,10,91,275 to be precious) on maturity.