Buy or Rent? Navigating property decisions under the old tax regime

When evaluating financial decisions such as renting versus buying a property, understanding the tax implications under the old tax regime is crucial. This analysis compares the tax savings from House Rent Allowance (HRA) exemptions for three rental scenarios ( ₹25,000, ₹35,000, and ₹50,000 monthly HRA) against the tax benefits of a home loan for a property valued at ₹1 crore with an ₹80 lakh loan. By calculating the exemptions and deductions available, we can assess how these tax savings align with the costs of renting versus buying, providing a clearer perspective on financial planning.

House Rent Allowance

The exemption related to house rent allowance is provided u/s 10(13A) of the Income Tax Act, 1961, the manner of computation of such HRA is provided under rule 2A of the Income Tax Rules, 1962.

“As per these rules, the exemption related to HRA will be least of the following,” says Suresh Surana, a Mumbai-based chartered accountant.

1. the actual HRA received; or
2. actual rent paid (-) 10% of basic pay; or
3. 50% of basic salary plus dearness allowance in case the assessee lives in a metro city such as Mumbai, Kolkata, Delhi or Chennai.

For each scenario, the annual HRA, 50% of basic salary ( ₹4.5 lakh, assuming a basic salary of ₹9 lakh), rent paid (equal to HRA), and 10% of basic salary ( ₹90,000) are considered.

Also Read: Planning to invest in property this financial year? Here are 5 things to keep in mind

“The exemption is the least of these values: ₹2.1 lakh for Option 1 (HRA ₹25,000), ₹3.3 lakh for Option 2 (HRA ₹35,000), and ₹4.5 lakh for Option 3 (HRA ₹50,000, capped at 50% of basic). The corresponding tax savings, calculated at 31.2% (30% + 4% cess), are ₹65,520, ₹1,02,960, and ₹1,40,400 respectively,’ says Surana.

The HRA Scenario table outlines the tax savings from HRA exemptions for three options.

“The ‘Home Loan’ table details the tax benefits for Year 1 of an ₹80 lakh loan over 20 years at 8% interest, with an annual EMI of ₹8,02,932.47. The interest for Year 1 is approximately ₹6.37 lakh, but the deduction is capped at ₹2 lakh under Section 24(b) for Self occupied property.” says Surana.

The principal repayment component ( ₹1.65 lakh) would be eligible for a deduction of ₹1.5 lakh under Section 80C, totalling ₹3.5 lakh in deductions and ₹1,09,200 in tax savings.

The tax savings in the aforementioned options would be as follows:

“The decision to buy or rent a property should not be based solely on tax benefits but on overall financial and lifestyle factors,” says Surana. Also, remember that the HRA and tax benefits on home loans will come into play only if you are in the old tax regime. It could also be that the new tax regime makes more sense for you even without these deductions.

Also Read: Unlocking tax savings: How to navigate Capital Gains Tax on inherited properties

“When considering the decision to rent versus buying a first home or investment property, it is important to consider factors such as location, potential appreciation, and the possibility of renting when relocating to a different city,” says Suneel Dasari, CEO, EZtax.in.

The real estate market is currently not particularly hot, as a result of the global economy and the tariff culture. “However, it is a buyers’ market if the location and negotiated price are accurate.” says Dasari.

Anagh Pal is a personal finance expert who writes on real estate, tax, insurance, mutual funds and other topics