Earning ₹12 lakh a year? Here's what you should consider before deciding whether to rent or buy an apartment
Those earning ₹12 lakh annually could save ₹80,000 post-Budget 2025 but to buy a house they must be able to afford a down payment and service home loan EMIs
To enhance affordability for middle-class homebuyers, the Finance Minister announced on February 1 that no income tax would be payable on earnings up to ₹12 lakh— ₹12.75 lakh including standard deductions—under the new tax regime. If you earn around ₹12 lakh a year and are considering buying a house, here’s what you should consider before deciding whether to buy an apartment or continue to stay on rent.
Tax experts suggest that prospective buyers earning around ₹12 lakh annually could have ₹80,000 in savings each year, which they can set aside for their home-buying budget. However, they should ensure they can make a substantial down payment and are financially secure enough to service the equated monthly installments (EMI) for a home loan.
Experts also emphasize that the decision to buy a home versus renting involves comparing the home loan EMI with current rent payments, while weighing the long-term benefits of homeownership against the flexibility renting offers. When budgeting for monthly rent, it’s crucial to remember that no more than 30% of one's income should be allocated to housing costs.
The increase in disposable income due to revised tax slabs in Budget 2025 may allow individuals to allocate more funds towards EMIs, significantly enhancing their home loan eligibility. “As a result, a single borrower may now be able to afford a property worth ₹6-7 lakh more solely due to tax savings. Additionally, if a co-borrower with a similar income level applies jointly, the combined home-buying budget could increase by ₹12- 14 lakh,” said Raoul Kapoor, co-CEO, Andromeda Sales and Distribution Pvt Ltd.
This shift is expected to drive demand in the mid-segment housing market, making homeownership more accessible for a larger section of buyers especially in suburbs of metro cities and Tier II cities, he adds.
Here’s how individuals earning ₹12 lakh per annum can make the most of Budget 2025’s proposals
Financial experts advise that the additional monthly tax saving on account of the Budget 2025 proposal should be viewed as a buffer and not a primary EMI source. Instead, those earning ₹12 lakh per annum could make use of Budget 2025’s largesse to direct 50% towards a future-property down payment fund, 30% to build an emergency fund and invest 20% in liquid funds for immediate property-related expenses.
The standard thumb rule is 30-35% of net income for total EMIs, points out Sanjeev Govila, Certified Financial Planner, CEO, Hum Fauji Initiatives, a financial advisory firm.
Young, unmarried professionals (25-35 years) in tier-1 cities can stretch up to 40-45% of their income for EMIs, provided they have at least six months of emergency fund, adequate health insurance, no other significant loans and a growing career trajectory in stable sectors, he advises.
For married individuals with dependents, the EMI burden should ideally not exceed 30% due to education expenses (averaging ₹3-4 lakh per annum for private schools), healthcare costs for family, and regular household expenses for 3-4 members, he explains.
However, a higher EMI allocation (even up to 50%) can work if you have a solid passive income stream. But then, your EMI should help you sleep better, not keep you up at night, he adds.
Can you afford the down payment?
A few tax experts are of the view that an individual earning ₹12 lakh may not be in a position to afford a down payment to buy a house individually but a couple earning ₹24 lakh per annum may be in a much better position to do so.
According to Surabhi Marwah, Tax Partner, EY India, while the effective saving that accrues to a person earning ₹12 lakh per annum would be around ₹80,000 post Budget 2025, the person may not be able to pay a down payment of ₹9 lakh for a ₹45 lakh apartment in a Tier 2 or Tier 3 city.
Here it is assumed that the individual earns ₹1 lakh per month, pays a monthly rent of ₹25,000 and his other expenses are around ₹50,000. Under the proposed Concessional Tax Regime (CTR) the monthly tax savings that will accrue to this individual will be ₹6666 or ₹80,000 per annum. Assuming that this individual has accumulated savings of around ₹6 lakh for the house by saving ₹18,333 per month earlier [1,00,000 – 25,000 – 50,000 – 6,666 (taxes)], he will now be able to save ₹25,000 (18,333 + 6,666) per month to save or invest.
With past accumulated savings of ₹6 lakh and additional savings of ₹80,000, the individual’s total savings would amount to ₹6,80,000. While this is a positive scenario, the ₹9 lakh down payment required for a ₹45 lakh apartment (in a Tier-2 or Tier-3 city) would likely be beyond his/her current savings, explains Marwah.
Having said that, a couple with a combined income of ₹24 lakh ( ₹12 lakh each) with their tax savings post-amendment amounting to ₹1,60,000 ( ₹80,000 each), may be in a better position to afford a house.
A couple earning ₹2 lakh per month, having a monthly rental outgo of ₹40,000 and other expenses of ₹1 lakh, monthly tax savings under the proposed CTR of ₹13,333 ( ₹1,60,000/12) and past accumulated savings of ₹15 lakh may want to consider buying an apartment.
It can be assumed here that the couple were saving ₹46,667 per month earlier [2,00,000 – 40,000 – 1,00,000 – 13,333 (taxes)], they will now be able to save ₹60,000 (46,667 + 13,333) per month to save or invest. With past accumulated savings of ₹15 lakhs and additional savings of ₹1,60,000, the couple’s total savings would amount to ₹16,60,000. With ₹14 lakh required for a 20% down payment on a ₹70 lakh apartment, the couple should have enough savings for the down payment. They would also need a loan for the remaining amount, but the monthly surplus should help in managing the EMI, she explains.
Therefore, while both the individual and the couple benefit from the proposed tax savings, the individual is unable to afford the down payment for the ₹45 lakh apartment at this point. On the other hand, the couple is in a position to comfortably make the down payment for the ₹70 lakh apartment, though they will need to factor in the EMI and ensure it does not exceed their surplus, she adds.
Buy an apartment if …
Buying an apartment makes sense when you plan to stay in the house for at least 10-12 years (ensuring appreciation transaction costs are recovered), your home loan EMI is less than at least 40% of your net monthly income, and you have an emergency fund to meet expenses for the next six months in place, Govila advises.
The property price-to-annual rent ratio should also be below 20x. This means that if an apartment costs ₹1 crore but the rent is only ₹20,000 a month, renting makes more sense.
You value stability and homeownership benefits such as customisation, no landlord issues and emotional security, he adds.
Marwah is of the view that the decision to purchase a house as compared to renting, would also involve comparing the home loan EMI with the current rent and considering the long-term advantages of owning a property versus the flexibility renting provides.
“Ideally, rent should not exceed the monthly savings potential after all expenses. If the EMI is much higher than the rent and leaves little room for savings, they may want to continue renting until they can comfortably afford the purchase,” she says.
Continue to stay on rent if…
Your job/career is uncertain or you might relocate in the next 5-7 years, says Govila.
Buying becomes financially inefficient if the rental yield (annual rent ÷ home value) is below 2.5%.
You’re in a high-cost metro (Mumbai, Bengaluru) where EMI outpaces reasonable rental cost.
You want more liquidity for investments, as real estate locks up a large portion of capital, he adds.
Additionally, when deciding on the right amount to allocate for monthly rent, it is important to remember the general rule of thumb to not spend more than 30% of one's income on housing.
One should also take into account other expenses such as debt repayments, savings, and living expenses. The location can impact both rent and commuting costs, so researching the local rental market is necessary to ensure the rent is reasonable, advises Marwah.
Further, one's future financial plans and lifestyle preferences play a role in this decision, along with the need to maintain an emergency fund for unexpected expenses. By considering all these factors, one can find a rent amount that provides a stable, comfortable, and financially secure life, she adds.
With inputs from Mehul Thakkar in Mumbai