Advantages Of Buying A Home
3 reasons why people buy a home over renting:
- Financially Sound
- Tax Deductions on Principal Repayment
- Tax Deductions on Payment of Interest
This is the most common question for the majority of the people today, which is better buying a home or renting? The decision between the two is generally affected by the amount of money you have at the end of the month, the type of lifestyle the person leads, the amount of flexibility required & the amount of savings he can accumulate over the years. But from all research, we had seen that buying a home over renting has many benefits in the long run.
People buy property generally for the following 3 reasons over renting are as follows:
When people feel they are financially sound they generally think of buying a home better than renting. People see buying a home as an investment that can grow or appreciate in the future. In case of renting they feel it’s just throwing money away.
If we consider over the long run it is possible for a renter to end up with a huge fund than someone who buys a home, but practically speaking ownership has worked out better for most people over the long run.
Though ownership gives less flexibility to move from one city or place to another still buyer of a property will be having an ownership asset at the end of the loan term.
Whereas in the case of renting the amount spent is almost the same if we consider the same long term but get nothing except the place to stay.
Tax Deductions on Principal Indemnity
People can avail a few deductions in income tax while taking home loans in respect of principal repayment. Under section 80C of the Income Tax Act, the maximum deduction eligible is ₹1.5 lakh including all other tax-saving investments for the repayment of the principal amount of home loan.
People can also claim for stamp duty and registration charges under this section itself in the year in which it is made.
Tax Deductions on Payment of Interest
Also, deductions in income tax can be availed for interest payment on home loans under section 24 of the Income Tax Act. One can avail the deduction as tax benefit on home loan for payment of Interest.
The self-occupied property allows a maximum limit of deduction up to ₹2 lakh if the completion is done within 5 years from the end of the Financial Year in which the person purchased; otherwise, the maximum limit is ₹30,000.
Indeed, this is the best time to buy a home over renting and it can be understood by highlighting the difference between the money that an individual spends if he rents an apartment over opting for a home loan to purchase their first home.
Currently, the rate of home loan interest is at the lowest. Renting means you don’t own. Nut when you pay EMI, you own the asset at the end of the stipulated period. Having a shelter of your own any time is better than renting.
Methodology To understand the calculation:
An affordable property (maximum carpet area: 200 sq mt) is within ₹45 Lakhs. An individual who earns a salary of ₹12.8 Lakh per annum, will earn close to ₹1,06,666 per month.
Consider this, if one chooses to stay on rent by paying ₹20,000 per month, they will end up shelling out ₹2.40 lakh every year. If they apply for a home loan to buy a home of Rs.45 Lakh, they will get a sum of ₹36 Lakh (80 percent of ₹45 Lakh) from the home loan provider. The rate of interest is 7.25 percent (assumed only) and the tenure for the loan is 25 years.
The buyer can avail tax benefits like-80C (maximum benefit of Rs.1.50 lakh); 24B (maximum benefits of ₹2 lakh); and 80EEA (maximum benefit of ₹1.5 lakh, valid till 31st March 2021).apart from these, the Credit Linked Subsidy Scheme (CLSS) offers a benefit of maximum ₹2.30 Lakh, which is valid till 31st March 2021.
Hence with the CLSS scheme in place, one’s loan amount would come to ₹33.70 Lakh. With the reduction in the loan amount, the monthly EMI would be ₹24359.
The difference in Cost Incurred:
A person earning ₹12.8 Lakh per annum who is shelling out a monthly rent of ₹20000 will have an estimated total tax-deductible of ₹1,41,211 for their salary.
However, after purchasing a home through a home loan and with all the above-mentioned tax benefits, their total tax-deductible will come down to ₹1,01,461. The difference in total tax-deductible will be around ₹39,750, which translates into a monthly benefit of ₹3,313.
The monthly tax benefit sum reduces the EMI on the home loan. In this case, the EMI comes down to ₹21,046 is just ₹1,046 more than the monthly rent.
Despite paying rent for 25 years, you don’t own anything. Paying a little more money can give you a lifetime of happiness and safety. A person gets an asset for just a few pennies more only.
Thus after identifying all the reasons & calculations, it is clear that buying property is better than renting only if we have some amount of savings for our own contribution of at least 20% of the property value.