After years of shuffling through petty assignments, Rohit finally landed his dream job. He was earning a decent salary and wanted to settle down. However, the moment he decided to relocate to join a new company, the first issue that popped up was that of his accommodation. He was confused between renting a place or buying a house of his own. Thankfully, his employer, who had faced a similar situation, guided him towards the best possible step.
The dilemma between paying rent or home loan EMI is common for people who plan to move to a different place for professional purposes. However, the decision can significantly affect their financial goals and future.
Read further to decide the options that would be profitable for you!
A rented house might help you have a shelter at a lower cost than a home loan, but the property is never yours. You pay the rent for years and sometimes decades, but the ownership is never transferred in your name. In short, paying monthly rent is a pure expense. Whereas, with a home loan, you increase your equity in the house with every EMI you pay. Ultimately, at the end of the tenure, you own the house you pay the EMI for.
- Tax benefits
There are multiple tax benefits on home loan repayment on both principal and interest. As per the Income Tax Act 1961, you can claim these tax deductions from your income. As per section 80C, you can claim a tax deduction on principal repayment of up to Rs 1.5 lakh. Similarly, as per section 24(b), you can claim a deduction of up to Rs 2 lakh on interest repayment. Moreover, if you avail a home loan for the first time, you can claim an additional deduction of Rs 50,000 under section 80EEE. Though you can claim a house rent allowance from your employer for the rent paid, it is only for salaried employees. There is no such tax deduction for self-employed individuals. Also, there are several terms and conditions associated with claiming HRA for rent paid.
In the long run, paying monthly rent is expensive as compared to paying home loan EMI.
Here’s an example:
Suppose, the value of the property is Rs 60 lakhs and you apply for a home loan for Rs 54 lakhs at 6.5% interest rate at a tenure of 20 years. Your EMI would be Rs 44,734, while the total payable amount would be Rs 1.07 Cr.
Whereas if you pay a rent of 20,000 with a rental appreciation of 5%, you are most likely to end up paying Rs 1.26 Cr at the end of 20 years. Therefore, if you plan to live in the same city for more than 15 years, buying a home would be a better option.
Whether you should pay monthly rent or EMIs depends on your financial standing. You must carefully analyse your income, the capital appreciation of the property, interest rates and rentals of the area you want the loan in before making the decision. You can use a home loan EMI calculator to understand the total amount repayable and accordingly take a decision.