You can’t buy a house? Don’t worry. You can still create wealth.
Ashish & Riya Banerjee are interior designers. They have recently moved to Mumbai after being offered positions in a multi-national company. They are currently staying at the company guest house and are in the process of settling down in a new city. Although both would have preferred buying a house in Mumbai, but given the capital values and their loan eligibility they can’t. Renting an apartment seems to be the only option. They are disappointed for being unable to buy a house in Mumbai.
There are many aspiring young professionals who are migrating to global cities like Mumbai, Gurgaon, Bengaluru etc. for work reasons. Given their qualification and aspiration they are keen to own a house in the city where they work. Not only does it give the emotional security but also ‘wealth-effect’. However owning a house in a big city is not the only way to create wealth. Living in a house encompasses many other aspects that one should be aware of. If one looks at tax benefits that Income tax laws provide to salaried individuals, one can create wealth systematically while living on rent.
Let’s assume you own a house and have a home loan on it. If you are using it for self-use, you can avail a tax deduction of only 1.5 lakhs per annum. Provided interest paid via EMIs to the home loan provider is 1.5 Lakhs or above. However if you can’t buy a house and going for a rental accommodation is the only way left alike Ashish and Riya, then there are two ways to rent a place. You can either stay at a company leased accommodation where your company would pay for the apartment or you rent an accommodation on a personal lease basis where you would bear all the charges by yourself. Before anyone makes a decision on which option to go with, it is important that they understand what benefits each of these options gives them. Let’s look at them individually.
In a company lease, the rent agreement is signed between the owner of the apartment and the employer who is paying the rent for the accommodation on behalf of the employee. This type of an agreement helps a person who might not be able to arrange an upfront fee such as a security deposit that is required at the time of the agreement. In large cities like Mumbai and New Delhi the security deposits can be equivalent to 6 months or more of the monthly rent. This can be difficult for some employees to arrange instantly and for such individuals renting a house through a company lease is a more feasible option. The rent is usually deducted on a monthly basis from the employee’s salary depending on the company policy. A company lease accommodation is taken as a perquisite under the Indian income tax law. The rent amount is included in the overall salary of the employee which is taxable. The tax is either on 15% of the employee’s salary or the amount of the rent that the employer pays to the owner, whichever is less. This type of renting does not benefit an individual in saving tax as the rent amount is added to the taxable salary.
A personal lease on the other hand is when an individual finds a rented accommodation and pays for it on his own. The agreement of this kind is only between the individual and the owner of the apartment. Although the individual would have to bear the cost of registration, brokerage and security deposits however he will benefit from the tax deductions he would get on his total salary. This is because the rent this individual will pay would be exempted from his salary as a HRA or House Rent Allowance. The tax amount that would be exempted would either be based on the HRA that the individual received from the company or the rent paid over 50% or 40% (based on the population of the city) of the basic salary or any excess rent paid over 10% of the salary, whichever is less.
Although there isn’t a tax advantage that an individual gets with a company lease accommodation, both the tenant and the owner benefit from security and timely payments that the company provides them respectively. With a personal lease apartment the individual has to bear the cost of different things that need to be managed for renting a place on his own. However, all of these extra costs are somewhat nullified due to the tax that this individual is able to save through his HRA exemption.
Now if you compare these features of a rented apartment with a self-occupied apartment, you would realise that you not only incur annual maintenance, mortgage, house-tax payments but also avail only 1.5 Lakhs tax deduction in case of self-owned property. However remember, taxes saved in case of rented accommodation can always be invested in equity, gold and debt products giving not only inflation-beating returns but also, partial liquidation, asset-diversification and balanced portfolio advantages.
Please note, that your decision to choose an option depends on a detailed calculation that you should do in consultation with your financial advisor and/or tax advisor. The numbers do matter as they do in your salary.
Amit Kukreja is a fee-only financial planner (FPSB) and Investment Adviser (SEBI). He is the founder of WealthBeing Advisors, a financial planning and wealth advisory firm.