In many Indian cities, renting and investing the difference builds more wealth on paper. In the illustrative Mumbai example below (₹1.2 crore flat, 2.8% rental yield, 7.5% loan), the renter has about ₹6.3 crore pre-tax after 20 years against a flat worth about ₹3.5 crore. Buying comes out closer when yields are near your loan rate, prices grow faster, or you wouldn't really invest the difference.
The decision is often made on feeling rather than numbers, and that is not wrong: a home gives stability that a spreadsheet cannot price. But you should know what the choice costs. This guide gives you a framework to compare buying with renting in 2026, the tax rules for Tax Year 2026-27 under the Income-tax Act, 2025, and a worked example with every assumption on the table.
The question to ask
The real comparison is not "EMI versus rent". It is this: if both households spend the same amount each month, who has more wealth after 20 years? The buyer ends up with a house. The renter ends up with whatever they invested: the down payment and purchase costs they did not spend, plus the monthly gap between the cost of owning and the rent. Which side wins depends on a handful of inputs, and you can test your own in our rent vs buy calculator.
Step 1: Check the rental yield
Divide a year's rent by the price of a comparable home. That is the gross rental yield. Its inverse, price divided by annual rent, is the price-to-rent ratio.
Example: a ₹1.2 crore flat that rents for ₹28,000 a month earns ₹3,36,000 a year. The yield is 3,36,000 ÷ 1,20,00,000 = 2.8%, and the price-to-rent ratio is about 36.
Now compare that yield with your home-loan rate. SBI's home loans start at 7.25% (card rate effective 20 May 2026), and the RBI raised the repo rate from 5.25% to 5.50% on 7 October 2026, so expect bank rates to edge up. If you borrow at around 7.5% to own an asset that would rent for 2.8% a year, the gap has to be made up by price growth. The lower the yield relative to your loan rate, the more you are betting on appreciation when you buy.
Step 2: Add up the full cost of owning
Most people judge affordability by the EMI alone. The real cost of owning includes:
- EMI: monthly loan repayment (principal + interest). Early EMIs are mostly interest.
- Down payment: usually 20% or more of the price. The real cost is what that money would have earned elsewhere.
- Stamp duty and registration: paid upfront and not recovered when you sell. Rates are set by each state. In Maharashtra, for example, the Stamp Act levies 5% on a residential conveyance, women buyers pay one percentage point less (from 1 April 2021), local cesses can be added in some cities, and the registration fee is charged on top. Check your state's registration department before you budget.
- Maintenance and repairs: painting, plumbing, appliances, periodic renovation.
- Society charges and property tax: recurring, and they tend to rise over time.
- Home loan insurance: often offered or bundled with the loan; ask the lender whether it is optional.
- Selling costs and tax: brokerage when you sell, and capital gains tax (see below).
Renting has costs too: a security deposit (often several months' rent), brokerage, yearly rent increases and the cost of moving when a landlord wants the flat back.
Step 3: Know the tax rules for Tax Year 2026-27
The Income-tax Act, 2025 applies from 1 April 2026. The home-loan benefits still exist, but under new section numbers, and only under the old regime for a home you live in.
| Benefit | Old regime | New regime (default) |
|---|---|---|
| Interest on loan for a self-occupied home | Up to ₹2,00,000 a year under section 22(2) (formerly 24(b)); ₹30,000 if construction is not completed within 5 years | Not allowed (section 202) |
| Principal repayment | Within the ₹1.5 lakh section 123 limit (formerly 80C), shared with EPF, PPF, ELSS and others | Not allowed |
| Interest on a let-out home | Deductible against rent, with limits on setting off a loss | Deductible against rent, with limits on setting off a loss |
| HRA exemption for a renter | Available (Schedule III, formerly section 10(13A)) | Not allowed |
Two points people miss. First, in the early years interest far exceeds ₹2 lakh, so the cap binds. On a ₹96 lakh loan at 7.5%, first-year interest is about ₹7.13 lakh, yet only ₹2 lakh is deductible. At the 30% slab plus 4% cess, that saves at most ₹62,400. Second, if your EPF already fills the ₹1.5 lakh section 123 limit, principal repayment adds nothing. In the new regime both benefits are zero. Renters in the old regime may claim HRA instead; our guide on HRA exemption covers the rules. Which regime suits you is covered in New vs Old Tax Regime, Tax Year 2026-27.
When you sell, a house held for more than 24 months is a long-term asset. The gain is taxed at 12.5% without indexation for transfers on or after 23 July 2024. Resident individuals and HUFs who bought land or buildings before that date can pay the lower of 12.5% without indexation or 20% with indexation.
A worked example: Mumbai 2BHK, ₹1.2 crore
Illustrative only. The figures below are assumptions chosen to show the method, not forecasts or market data.
| Assumption | Value |
|---|---|
| Flat price | ₹1.2 crore |
| Rent for a similar flat | ₹28,000 a month, rising 5% a year |
| Down payment (20%) | ₹24 lakh |
| Stamp duty and registration (assumed) | 6% = ₹7.2 lakh |
| Home loan | ₹96 lakh, 7.5%, 20 years, rate assumed fixed |
| Maintenance and property tax | ₹11,000 a month, rising 5% a year |
| Home price growth | 5.5% a year |
| Renter's investment return | 10% a year, compounded monthly, pre-tax |
| Tax benefits, selling costs, capital gains tax | Ignored (as in the new regime) |
The buyer
- Buying: EMI on ₹96 lakh loan (80% LTV, 7.5%, 20 years; SBI home loans start at 7.25% from 1 April 2026) = ₹77,300/month + ₹8,000 maintenance + ₹3,000 property tax = ~₹88,300/month total cost in year 1.
- Upfront: ₹24 lakh + ₹7.2 lakh = ₹31.2 lakh.
- After 20 years the loan is repaid and the flat is worth ₹1.2 crore × 1.055 to the power 20 (about 2.92) ≈ ₹3.50 crore.
The renter
- Renting: ₹28,000 rent + investing the ₹60,300 difference in equity mutual funds every month in year 1 (₹88,300 − ₹28,000), plus investing on day one the ₹31.2 lakh the buyer spent upfront.
- Each year the rent and the buyer's running costs both rise 5%, so the monthly amount the renter invests changes. In year 20 the rent is about ₹70,800 a month, still below the buyer's outflow.
- After 20 years, at 10% a year, the renter's portfolio is worth about ₹6.3 crore before tax. The ₹31.2 lakh lump sum alone grows to about ₹2.29 crore.
How sensitive is the answer?
| Scenario | Renter's portfolio | Buyer's home |
|---|---|---|
| Base case (10% return, 5.5% price growth) | ₹6.33 crore | ₹3.50 crore |
| Return 12% | ₹8.74 crore | ₹3.50 crore |
| Return 8% | ₹4.63 crore | ₹3.50 crore |
| Price growth 7% | ₹6.33 crore | ₹4.64 crore |
| Return 8% and price growth 7% | ₹4.63 crore | ₹4.64 crore |
| Rent ₹40,000 (4% yield), other inputs base | ₹5.05 crore | ₹3.50 crore |
At a 2.8% rental yield, renting and investing comes out ahead in most of these cases. When returns are modest and prices grow faster, the two end up level. Remember the caveats. The renter's figure is pre-tax: equity gains above ₹1.25 lakh a year are taxed at 12.5% when you sell, which would trim it. The buyer gets a home to live in and no rent risk. And the renter's result depends entirely on actually investing every rupee of the difference for 20 years. Put your own numbers into the rent vs buy calculator, and use the home loan calculator to check the EMI at your rate.
When buying makes sense
- Rental yields in your area are high relative to your loan rate, so owning is not much costlier than renting each month.
- You expect to stay in the same city for a long time. Stamp duty and selling costs hurt if you sell within a few years.
- The EMI fits comfortably within your take-home pay, with room left for an emergency fund and retirement saving.
- You can make the down payment without emptying your emergency fund.
- You value stability, freedom to modify the home, and no landlord. These are real benefits, even if they don't show in a calculator.
- You know you would not invest the difference if you rented. An EMI is forced saving, and that has value.
If what you want from property is the rental yield rather than a home, listed REITs give you commercial real estate from about ₹300 a unit, with quarterly payouts and no tenant to manage. The five listed REITs are compared in REITs in India 2026.
When renting is the smarter move
- The rental yield is far below your loan rate, as in many large-city flats.
- Your job or family plans may move you within the next few years.
- The EMI would stretch your budget or leave nothing for other goals.
- You are still building your investments and emergency fund.
- You can commit to investing the difference every month, automatically.
If you do buy: keep the loan cost down
Under RBI rules, banks and lenders cannot charge prepayment penalties on floating-rate home loans taken by individuals for non-business purposes. Part-prepaying early, while the balance is highest, cuts total interest the most. Before you prepay, compare the post-tax loan rate with what your investments might earn. Our home loan prepayment vs SIP guide walks through that decision, and the loan prepayment calculator shows the interest and tenure saved.
The bottom line
A home is a place to live first and an investment second. In the base case above, the renter ends with about ₹6.3 crore before tax and the buyer with a home worth about ₹3.5 crore, because a 2.8% rental yield is far below a 7.5% loan rate. That gap closes if the money is not invested, if returns disappoint, or if prices grow faster than expected. Work out your own yield, your full cost of owning and your tax position before you decide.
This article explains a framework and an illustrative calculation. It is not personalised financial or tax advice. Stamp duty, local charges and tax treatment vary by state and by your circumstances.
