Should You Buy or Rent a House with ₹12 Lakh Income? Here’s What You Need to Know

To make housing more affordable for middle-class buyers, the Finance Minister announced on February 1 that individuals earning up to ₹12 lakh— or ₹12.75 lakh with standard deductions— will not have to pay income tax under the new tax system. If your annual income is around ₹12 lakh and you’re thinking about purchasing a home, there are important factors to consider when deciding between buying an apartment or continuing to rent.

Tax specialists indicate that potential buyers with an income of about ₹12 lakh could save around ₹80,000 each year, which could go towards their home-buying expenses. However, it’s essential to ensure that they can make a significant down payment and are financially stable enough to handle the equated monthly installments (EMI) for a mortgage.

Experts also highlight that the choice between buying a home and renting should involve comparing the home loan EMI with current rental costs, while also considering the long-term advantages of owning a home versus the flexibility that renting provides. When planning for monthly rent, it’s vital to keep in mind that housing expenses should ideally not exceed 30% of one’s income.

The revised tax slabs in Budget 2025 are indeed set to provide a significant boost to disposable income, allowing individuals to allocate more towards their EMIs for home loans. This increase in home loan eligibility could enable single borrowers to afford properties worth ₹6-7 lakh more, purely from tax savings. When a co-borrower with a similar income joins the application, the combined budget could rise by ₹12-14 lakh, making it a great opportunity for many.

This shift is likely to stimulate demand in the mid-segment housing market, particularly in the suburbs of metro cities and Tier II cities, making homeownership more attainable for a broader range of buyers. Financial experts suggest that the additional monthly savings from the tax changes should be used wisely. They recommend allocating 50% of these savings towards a future down payment for a property, 30% to build an emergency fund, and 20% to invest in liquid funds for any immediate property-related expenses. This strategic approach can help ensure financial stability while pursuing homeownership.

The standard guideline for EMIs suggests allocating 30-35% of net income, according to a Certified Financial Planner. For young, unmarried professionals aged 25-35 in tier-1 cities, it’s possible to stretch this to 40-45% if they have a robust six-month emergency fund, adequate health insurance, no significant loans, and a stable career trajectory in growing sectors.

For married individuals with dependents, keeping the EMI burden ideally under 30% is crucial, especially considering additional costs like education, healthcare, and household expenses for a family of 3-4. However, if someone has a solid passive income, they might manage an EMI allocation of up to 50%, but it’s vital that the EMI doesn’t cause financial stress.

Regarding down payments, some tax experts believe that an individual earning ₹12 lakh may struggle to afford a down payment alone. However, a couple with a combined income of ₹24 lakh would likely be in a much stronger position to make that down payment, making joint applications a wise strategy for aspiring homeowners.

According to a tax partner, an individual earning ₹12 lakh per annum would see effective savings of around ₹80,000 after Budget 2025. However, this individual may struggle to afford a down payment of ₹9 lakh for a ₹45 lakh apartment in a Tier 2 or Tier 3 city.

Let’s break down the financial situation. If the individual earns ₹1 lakh per month, pays a monthly rent of ₹25,000, and has other expenses of around ₹50,000, they would have the following breakdown:

1. Monthly Income: ₹1,00,000

2. Monthly Rent: ₹25,000

3. Other Expenses: ₹50,000

4. Monthly Tax Savings (post-Budget): ₹6,666

From this, the individual’s monthly disposable income after expenses and taxes would be:

Disposable Income = Monthly Income – Monthly Rent – Other Expenses – Monthly Taxes

Disposable Income = ₹1,00,000 – ₹25,000 – ₹50,000 – ₹6,666 = ₹18,334.Previously, the individual was saving ₹18,333 per month. Now, with the tax savings included, they can save ₹25,000 per month (₹18,333 + ₹6,666).

Over time, if they accumulate savings of ₹6 lakh and add the annual tax savings of ₹80,000, their total savings would be:

Total Savings = Past Savings + Annual Tax Savings

Total Savings = ₹6,00,000 + ₹80,000 = ₹6,80,000

However, since the required down payment for the ₹45 lakh apartment is ₹9 lakh, the individual would still fall short, as their total savings of ₹6,80,000 would not cover the down payment. 

Thus, while the tax savings are beneficial, they may not be sufficient for this individual to afford the down payment on the apartment.

In the scenario of a couple with a combined income of ₹24 lakh (₹12 lakh each), their tax savings post-amendment amounting to ₹1,60,000 (₹80,000 each) indeed puts them in a better position to consider buying a house.

Here’s a breakdown of their financial situation:

1. Combined Monthly Income: ₹2,00,000

2. Monthly Rent: ₹40,000

3. Other Expenses: ₹1,00,000

4. Monthly Tax Savings: ₹13,333 (which is ₹1,60,000 divided by 12)

Calculating their disposable income:

Disposable Income = Monthly Income – Monthly Rent – Other Expenses – Monthly Taxes

Disposable Income = ₹2,00,000 – ₹40,000 – ₹1,00,000 – ₹13,333 = ₹46,667

Previously, they were saving ₹46,667 per month. Now, with the tax savings included, they can save ₹60,000 per month (₹46,667 + ₹13,333).

Now, considering their past accumulated savings of ₹15 lakh and the additional savings of ₹1,60,000 from tax savings, their total savings would be:

Total Savings = Past Savings + Annual Tax Savings

Total Savings = ₹15,00,000 + ₹1,60,000 = ₹16,60,000

For a ₹70 lakh apartment, a 20% down payment would be required, which is ₹14 lakh. Since they have total savings of ₹16,60,000, they have more than enough to cover the down payment.

While they would need to take a loan for the remaining amount of ₹56 lakh, their monthly surplus of ₹60,000 should help them manage the EMI comfortably. Therefore, this couple is in a strong financial position to consider purchasing the apartment.

While both the individual and the couple can take advantage of the suggested tax savings, the individual currently cannot manage the down payment for the ₹45 lakh apartment. In contrast, the couple is in a good position to afford the down payment for the ₹70 lakh apartment, but they must consider the EMI and ensure it stays within their surplus.

You should consider buying an apartment if you intend to live there for at least 10-12 years, which allows you to recover transaction costs through property appreciation. Additionally, your home loan EMI should be less than 40% of your net monthly income, and you should have an emergency fund that can cover your expenses for the next six months.

Moreover, the ratio of the property price to the annual rent should be below 20x. For instance, if an apartment is priced at ₹1 crore but the monthly rent is only ₹20,000, it would be more sensible to rent instead of buy.

You should also consider the benefits of stability and homeownership, which include the ability to customize your space, avoiding landlord-related issues, and the emotional security that comes with owning a home.

An expert believes that the choice between buying a house and renting should involve a comparison of the home loan EMI against current rent, while also weighing the long-term benefits of property ownership against the flexibility that renting offers.

She emphasizes that ideally, rent should not exceed the amount you can save each month after covering all expenses. If the EMI is significantly higher than the rent, leaving little room for savings, it might be wiser to keep renting until you can afford to buy comfortably.

You should consider continuing to rent if your job situation is uncertain or if you anticipate relocating within the next 5-7 years, the expert opined. Additionally, buying may not be financially sensible if the rental yield (annual rent divided by home value) is below 2.5%. This is especially true in high-cost metro areas like Mumbai and Bengaluru, where EMIs tend to exceed reasonable rental prices. If you prefer to maintain liquidity for other investments, as real estate can tie up a significant amount of capital, renting might be the better option. Lastly, it’s advisable not to spend more than 30% of your income on housing costs when determining how much to allocate for monthly rent.

Marwah highlights the importance of considering additional expenses like debt repayments, savings, and living costs when deciding between renting and buying a home. The location of the property can significantly affect both rent and commuting expenses, so it’s crucial to research the local rental market to ensure that the rent is reasonable.

Moreover, your future financial goals and lifestyle choices should also be factored into this decision. It’s essential to keep an emergency fund for unexpected costs. By evaluating all these aspects, you can determine a rent amount that allows for a stable, comfortable, and financially secure life.

Note: It’s important to remember that the decision to rent or buy a home is highly personal and depends on various factors unique to your situation. This discussion is for informational purposes only and should not be considered financial advice. Consulting with a financial advisor is recommended to understand the best option for your specific circumstances.