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Are you spending more on rent than you should?

August 27, 2020
Human needs can be categorised into two-essential and non-essential. Food, shelter and clothing are some of the essential needs. It is relatively easy to ensure food and clothing in India. The rising cost of real estate across the country, however, has made finding appropriate housing slightly difficult. Millions of people migrate to large cities from small towns and villages in search of better opportunities every year. Rental housing is the default option for a bulk of people who relocate.

There is a wide disparity in house rents across cities. Among the six biggest cities in the country, Mumbai has the most expensive rents, while Hyderabad is the cheapest. The average rent for a 650 sq ft apartment in Mumbai is ₹38,200, while the rent for a similar-sized apartment in Hyderabad is just  ₹11,000. The median rent across the six largest metro cities is ₹15,600, according to a Mint analysis of rental housing data.

Expensive rental housing in certain areas has a disproportionate impact on household expenses. According to the Household Survey on India's Citizen Environment & Consumer Economy, an average household in an urban area earned ₹29,690 in 2016, which would be equivalent to around  ₹31,800 currently. The average household in a metro city pays around half of its income as rent for housing. If the food and fuel expenses are taken into consideration, the avenue for savings reduces substantially.

The housing rent consumes the bulk of the monthly income for many families. It brings us to the question of how much should you ideally spend on housing? Experts say the rent along with the utility bills should not exceed 30% of the net take-home monthly income. Most people don't take into account charges for services like power and water while calculating the rental outgo. If you have a net monthly income of Rs 70,000, ideally you shouldn't be paying over  ₹21,000 as house rent.

The utility bills cannot be reduced beyond a limit, but the rent can be managed. Just like the wide variance in rents across Indian cities, rental charges vary across localities within a city. One can find an affordable housing option in the suburban areas of a metro city. However, the transportation expenses and the loss of time in commuting should be taken into consideration. If you can save on commuting costs substantially by paying a slightly higher rent, then the 30% limit can be relaxed.

Multiple surveys have found that Indians spend a large part of their income on housing, food and transportation. Though high rental costs increase the monthly outgo for housing, the situation can be mitigated through efficient financial planning. The shift to a different city in search of job opportunities or for other reasons is seldom instantaneous. Financial planning is of utmost importance while relocating. If you plan your finances in advance and set a budget for essential and non-essential needs, you will be able to manage all the expenses as well as save for the future.

Financial planning has various components like wealth accumulation, tax planning, expense planning and retirement planning. A multiplication of wealth along with tax planning can help you take care of the rental outgo. The house rent allowance is a major element of tax planning. Salaried individuals receive house rent allowance from their employers. If you receive HRA and stay in a rented house, you can claim tax exemption under Section 10 (13A) of the Income Tax Act, 1961. The exemption on HRA is based on the lower of the three factors.

  1. The HRA received
  2. The rent paid in excess of 10% of the salary
  3. In metro cities, 50% of the salary is allowed as HRA, while in non-metro cities the amount is 40% of the salary.

The lowest of the three will be allowed as HRA exemption, irrespective of the rent you pay. The exemption can be used most efficiently when the monthly rent does not exceed the HRA amount. Tax planning, however, is not limited to the exemption of the HRA. One can use the HDFC Life income tax calculator to get a clear picture of his/her tax liabilities and plan accordingly. Similarly, the HDFC Life compounding calculator can help you make efficient investments and retirement planners can ensure you set aside sufficient funds for retirement. A comprehensive financial plan assists you in reducing the impact of high rental expenses.

ARN: ED/08/20/20190

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