Why Rent could be considered over pension as retirement income

TownSIP Research ~ 15 min read

Rent as an income source or pension:

The recent Reserve Bank of India’s (RBI) policy decision to slash repo rates by 0.75 basis points (bps) and further by 25 bps has made home loans significantly attractive. It provides an opportunity for potential home buyers that cannot be missed. This steep cut has brought interest rates on home loans by banks to their lowest, between 6.90% and 7.8% and that is the lowest over a decade.

Home loans at these interest rates allow for considerable tax savings while creating an asset for end-user or recurring income throughout life as rent.

Let’s discuss numbers as to how it works.

A back-of-the-envelope comparison of a 30-year home loan of Rs 80 lacs at interest rates of 8.9% (pre-COVID) and 7.0% (post-COVID) results in an equated monthly instalment (EMI) of INR 63,795 and INR 53,224 respectively. The reduced rate of interest clearly helps the borrower to save INR 10,571 monthly. Considering this the buyer can finish the loan almost 11 years earlier at the same EMI if he takes a home now at an ongoing interest rate.

If this is not enough let’s also discuss tax benefits. If tax exemptions are considered at 3.5 lacs in a year, saving comes to 8,000 pm that becomes double if both spouses are working. Rental Income at a minimum of INR 25,000 brings down the actual outflow to approx. INR 35,000 for a house with 80 lacs loan on it.

After evaluating all these facts and figures, I can’t emphasise more on the fact that this is indeed a great time to invest in property for end-users and also for the investors who are planning rest as their retirement income. If you are at the age of 35 years and plan to retire by 55 years then this home could easily fetch you more rent than regular pension schemes available in the market. Isn’t it lucrative? Sure it is. Let me tell you how. Considering a rent escalation of 5% every year after 20 years when you retire. The rent you would be earning is close to Rs 65,000/- which is more than the pension that you will earn if you invest 20,000 each month for 20 years instead of paying EMI minus tax benefits. Moreover, a property always remains for your heirs.

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