15. Real Estate

What a purchase costs, what the tax code does with it, and what the rental yields imply.

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The largest financial commitment most Indian households make, with the highest transaction costs and the strongest emotions attached.

The financial half of the question reduces to a comparison of two rates: the home loan rate against the gross rental yield. In Bengaluru, Delhi NCR and prime Mumbai the first exceeds the second by a wide margin. The purchase is therefore financed by expected capital appreciation, not by the property's income. That may prove correct; it is a distinct bet from "renting is throwing money away."

The other half is not financial, and no arithmetic settles it. Stamp duty and registration alone remove 6%–8% of the value before the down payment, which makes short holding periods expensive; a fixed location constrains a career in a country where tech employment sits in a handful of cities; and family expectation is a real input that appears in no spreadsheet.

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15.1 Why people buy and why people rent

Why people buy

• They need somewhere to live
• They want control over where they live for a long period
• Emotional attachment to ownership (in India, frequently reinforced by family expectation)
• They believe it is a good investment

Why people rent

• Flexibility of location
• Reluctance to make a long-term financial and geographic commitment
• Insufficient capital for a down payment
• Simpler cash flow management

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15.2 The costs of buying in India

At purchase

Stamp duty and registration alone run to 6%–8% of the property value, and are payable in cash on top of the down payment. This is the most consistently underestimated line in an Indian property purchase.

Ongoing

At sale

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15.3 Home loan eligibility

Banks assess two things:

1. Do you have the down payment?: the asset test
2. Will your income cover the EMI?: the cash flow test

Loan-to-value limits

RBI norms cap LTV by loan size:

Stamp duty and registration are excluded from the property value for LTV purposes, so they must be funded entirely from your own capital.

FOIR

Lenders apply a Fixed Obligation to Income Ratio: total EMIs, including the proposed one, as a proportion of net monthly income. Typical ceilings are 50%–60%, tightening at lower incomes and loosening at higher ones. Existing EMIs, including a car loan and any credit card minimum, reduce the amount you can borrow.

Your credit score directly determines your rate. Lenders reserve their best pricing (currently around 7.25%–7.50%) for applicants scoring 750 or above.

Shop within a short window. Multiple loan applications generate multiple hard enquiries; concentrating them into a two-week period limits the impact on your score.

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15.4 Property and tax

While you own

Rental income is taxable after municipal taxes paid and the 30% standard deduction.

When you sell

Grandfathering: for land or buildings acquired before 23 July 2024, a resident individual or HUF may compute tax as the lower of 12.5% without indexation and 20% with indexation.

Exemptions on reinvestment:

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15.5 Rent versus buy, with Indian numbers

The financial comparison turns on rental yield (annual rent as a percentage of property value) and its inverse, the price-to-rent ratio.

Gross rental yields, Q2 2026

What the numbers imply

Compare the rental yield against the mortgage rate and against alternative returns:

Home loan rate                          ~7.25% – 8.50%
Gross rental yield, major tech cities    3.2%  – 5.5%
Net rental yield (after maintenance,
   property tax, vacancy)                roughly 1–2 percentage points lower

In Bengaluru, Delhi NCR and prime Mumbai, the cost of borrowing exceeds the gross rental yield by a wide margin. The purchase is therefore financed by expected capital appreciation, not by the property's income. That may prove correct; it is a distinct bet from "renting is throwing money away."

A common framing: below roughly 4% yield (above ~25× price-to-rent), renting and investing the difference has historically built more wealth; above roughly 5% yield (below ~20×), buying becomes financially competitive. That is a heuristic, not a law, and it is silent on everything non-financial.

The financial case for renting

• Liquidity: capital is not locked in a down payment and forced principal repayments
• Location flexibility: a fixed location can materially constrain career options in a country where tech employment concentrates in a handful of cities
• Diversification: a house is typically 5–15× annual income concentrated in one asset, one city, one micro-market
• No geographic market risk: some Indian micro-markets have appreciated enormously; others have been flat for a decade
• Maintenance is the owner's problem
• Competitive market: rents broadly track wage inflation, with competition between landlords

The financial case for owning

• Leverage: most of the investment is made with a loan at 5×–10× leverage, and the gains accrue to you, not the bank
• Forced saving: the down payment cannot easily be spent, and principal repayment is a monthly savings commitment. this, rather than appreciation, is the primary reason real estate builds wealth for most people
• Tax advantages: Section 22 and Section 123, in the old regime
• Long-run positive real return, with lower volatility than equities across most long-run studies
• Control: you decide what to improve and when
• Optional rental income later, which rises with inflation
• Long holding periods: people hold homes far longer than they hold financial assets, which gives compounding more time and removes the temptation to trade

The non-financial factors

These frequently dominate the financial arithmetic: high transaction costs make short holding periods risky; a fixed location limits career opportunity; community and schools matter; for most people it is the single largest investment they will make; and many people hold strong beliefs about it that are not financial in origin.

In India, add family expectation, which is a real input into the decision even though it does not appear in any spreadsheet.

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15.6 Rental property as an investment

Capitalisation rate  =  net operating income  ÷  market value

Why people are drawn to it: most fixed costs are incurred up front while rental income rises with inflation; paying off the mortgage leaves an asset producing inflation-adjusted income; it is tangible and comprehensible in a way that financial markets are not; and it carries some of the psychological satisfactions of owning a business.

What it actually involves:

• Time. It is a second job, with unpredictable demands.
• Cash flow. It is easy to own something profitable over twenty years and cash-flow negative for the first five.
• Vacancy. Expensive and unpredictable.
• Tenants. Finding them, managing them, replacing them.
• Legal exposure. Tenancy law varies by state; eviction can be slow and expensive. India's Model Tenancy Act, 2021 has been adopted by only some states.

Tax treatment is more business-like: rental income less municipal taxes less a 30% standard deduction, plus full interest deduction, with the set-off of house property loss against other income capped at ₹2 lakh a year.

REITs offer exposure to commercial real estate through a listed, liquid instrument. Several are listed in India. Distributions have a mixed tax character depending on the component (interest, dividend, or return of capital), which makes their taxation more complex than that of equity.

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15.7 Checklist

• If comparing rent versus buy, compute the rental yield for your specific micro-market, not the city average
• Include stamp duty, registration and GST in any purchase calculation: 6%–8% before you begin
• Note that a self-occupied home loan carries no tax benefit in the new regime