A house renders a sense of security and comfort to its owner. Whether to buy a house or rent it is probably one of the biggest questions that an individual faces. It is important to understand the implications of both – owning and renting property, before making any decision.

Importance of owning an asset:

The first question we ask ourselves before deciding on whether to buy or rent a house is - why should I purchase a house, when I can simply stay in a rented accommodation?

Here’s why –

Control on property

If you are staying in a rented premise, you cannot make any changes to it, without the landlord’s permission. Even if you are able to make some changes, you are only adding to the landlord’s property. However, with your own house, you can make alter it as per your liking, be it a wider parking lot or change in interiors like kitchen cabinets or paint the walls etc.

Investing in ‘future’

Barring the slowdown in the real estate sector as a whole, property value will always appreciate with time. Additionally, as compared to other investment avenues, the rate of appreciation is remarkable in case of real estate.

Forced Savings

Buying a house is a huge investment. Whether you use your own funds or borrowed ones, you ensure that the money is saved and invested and not spent.

Converting an expense to an asset

Paying rent is an expense that you incur whereas your expenditure towards buying a house helps you build an asset.

Personal milestone

Last but not the least, owning a house is on everyone’s wish-list. The earlier you achieve this milestone, the better chance you stand to reap greater long-term benefits.

Advantages of owning a home over renting…

So, what is the difference between paying monthly rents and monthly installments for a property? After all, you end up paying almost the same amount for both. Right? Wrong…

1. Payment made towards buying home, helps you build an asset. The amount paid towards paying rent and monthly installment for your loan maybe similar, but the difference is in terms of savings and investment that you make in terms of the latter.
2. Most real estate properties appreciate in value over time, so your home becomes an important asset.
3. You can claim tax benefits on both the principal and interest components of the home loan as per the Income Tax Act, 1961.

Interest component that can be claimed on the loan amount:

Your home loan gives you a tax benefit of up to Rs 1.5 lakh of interest paid in a financial year; provided the loan has been taken from a recognized financial institution to either buy or build a house, under Section 24(b) of the Income Tax Act. This is applicable for -

Loans taken on or after April 1, 1999 for acquiring or constructing a property.

The acquisition/construction should be completed within 3 years from the end of the financial year in which the loan was taken.

In other cases, where Loan is borrowed before April 1, 1999 for purchase, construction, reconstruction repairs or renewal of a house property, then the interest tax benefit will only will be up to Rs 30,000 on the loan amount.

Principal component that can claimed on the loan amount:

Under Section 80C of the IT Act, principal repayment up to Rs 1 lakh in a financial year are exempt from tax by each of the co-owners of the house property provided the loan is taken from a recognized financial institution only. Any housing loan taken from relatives or friends is thus not eligible for the Section 80C deduction.

Disadvantages of renting

Although renting a property allows you to have an accommodation well within your means, when compared to owning property, it suffers from various shortcomings.

Security deposit:

If you wish to take a house on rent, you need to pay a lump sum amount as a security deposit, generally aggregate rent of 5 months. This amount is returned back to you, once you move out of the house.

So for a house with a monthly rental of Rs 15,000 you shell out Rs 75,000 as security deposit. If you stay in this house for a year, you get back exactly Rs 75,000 without any interest or returns. Had you invested this money, you would have been able to earn some returns – it is, thus, an opportunity lost.

No creation of asset:

No matter how much rent you pay and how long you stay in the house, you cannot gain ownership of the house.

No control over rent increases:

Another key aspect is that the rent tends to increase every year. You have no control on it, as it is your landlord’s discretion.

Risk of eviction:

Since you do not own the house, there is absolutely no guarantee as to how long you can stay in it. If your landlord wishes to sell off his house or wants to rent it to someone else, you have no choice but to move out.

Limited tax advantage:

If you are staying in a rented accommodation and receive an HRA from your employer, you can claim a tax benefit under Section 10(13A) of the Income Tax Act, only on an amount that is least of the following three options:

1. HRA actually received from the employer
2. Paid in excess of 10% of salary
3. 50% of the salary (if residing in a metropolitan), else 40% of the salary

In case you don’t earn HRA or are self employed/ non-salaried, you can get deductions subject to the least of the following:

1. 25% of the total income or,
2. Rs 2,000 per month or,
3. Excess of rent paid over 10% of total income

No control over the property:

In case of a rented house, you need the landlord’s permission for virtually any repair or modification you wish or need to do in the house.

Tax treatment in case of ownership and rent - A comparison and analysis

Ownership has a significant tax advantage in comparison to rent.

Let us consider an example of a salaried individual who earns Rs 15 lakh p.a. He has 2 options – buy a house or rent a similar property. The below mentioned table indicates how he fares in both situations.

Note: The following assumptions have been made for calculation purposes

For Ownership: the person makes investments of Rs 7000 or less under section 80C to be able to claim the full tax benefit on the repayment of principal for the home loan.

For Rent: the person resides in a metropolitan and earns a basic salary of Rs 8.4 lakh. The remaining salary can be on account of other allowances etc.

*Tax benefits on rent of property are calculated on the basis of the least of the following:

1. HRA actually received from the employer
2. Rent paid in excess of 10% of salary
3. 50% of the salary (if residing in a metropolitan), else 40% of the salary

Additionally, in case you sell a property that you own, you can also save on tax on account of capital gains.

Any profit or gains arising from the transfer of a capital asset is chargeable as capital gains tax. Property is regarded as a capital asset and any gain arising from the sale of the property is taxable as capital gains tax. If the property is sold within 36 months of its acquisition, the proceeds from the sale are regarded as short-term capital gains.

If the property is sold on or after 36 months of its acquisition it is treated as long-term capital asset. Profits on long-term capital assets are long-term capital gains.

For computing short-term capital gains on property, the cost of acquisition and the cost of improvement (any additions or alterations to existing property) are deducted from the sale value. For computing long-term capital gains, the indexed cost of acquisition and indexed cost of improvement is reduced from the sale value.

Different tax rates apply for long-term and short-term capital gains. Short-term capital gains are taxed as regular income. For long-term capital gains, however, there are certain exemptions.

To avoid paying any long term capital gains tax, you can make use of section 54EC. As per this section, if within 6 months from date of sale of your residential house, you invest the whole or any part of the capital gain in bonds of the National Highway Authority of India (NHAI) or bonds of the Rural Electrification Board (REC) and hold onto the bonds for more than 3 years, you are free from any tax liability

In addition, under section 54 if you are able to channel the sale proceeds into the purchase of your new home within 2 years from the date of sale, then, your long term capital gains attract no tax, provided you not sell your new home within 3 years from the date of purchase.

Ownership of a house does not only ensure a secure roof over your head, but can also prove to be a great investment and savings vehicle.

Note: All the above calculation and details are based on the Income tax rules and regulations for FY 2009-10.