House Rent or Buy Decision
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Transcript of House Rent or Buy Decision
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8/2/2019 House Rent or Buy Decision
1/18
PROBLEM STATEMENT
APPLICATION OF LEASE FINANCING ON HOME BUY OR RENT DECISION FOR SHORT TERM PERIOD
Mr Badlikar is working in a reputed Indian company since last 16 years. He has been recently transferred to Chandigarh for a project work
which will be executed in 5 years. After completion of the project, he will be transferred to new project site in some other city.
Mr Badlikar is looking for a 2 bedroom house on rent in Chandigarh. He has zeroed in on a flat in a society in Sector-62 on a payment of Rs 14000
per month. Following other conditions are to be agreed by both the parties:
1. The house will be given on rent to Mr Badlikar for 5 years
2. There will be an increase in the rent every year. The payable amount of rent shall be equal to the HRA paid by the company.
3. The rent of every month is to be paid at the end of the month
Above conditions were acceptable to Mr Badlikar. However, he got an information that an identical size f lat is available for sale in the same
society for Rs 40 Lakh. One of his close friends advised him to purchase the flat instead of taking it on rent. The purchased house can be sold at
the end of 5 years which Mr Badlikar will be transferred again to some other project. Though not much convinced, Mr Badlikar tried to compare
both the options.
Following data is avaialble with him:
a. Basic Purchase Price of the flat : 40,00,000
b. Registration Charges @ 5%c. Other charges associated with Purchase of flat : 50,000
d. Cost of flat which can be financed by Housing loan from Bank - 80% of the basic purchase price
e. Funds avaialble for permanent withdrawal from the Provident fund (earning 8.5% interest) - 10,50,000
f. Home loan interest rate : 11% (assume no change in next 5 years)
g. Bank Processing charges for home loan apprvoal : Nil (as special scheme is going on)
The Bank officials have given the payment schedule (which is enclosed at Annexure - 1), indicating the monthly amount of EMI, principal and
interest payable on a loan of 32 lakh.
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Following additional information is available
Annual savings in PF of Mr Badlikar= more than 1 lakh per annum
The interest in the PF is compounded annuallyHighest Income tax rate = 30% + 3% education cess
Present Taxable Income in 30% slab = Approx 5 Lakh
Present Rate of Capital gains Tax = 20% + 3% education cess
Assumptions :
Assume Income Tax slabs and rates shall remain unchanged
Rate of appreciation of property in chandigarh 8% per annum
There is an annual upward Change of 6% in Cost inflation Index every year wrt previous year
Mr Badlikar want to know which option is better for him, taking the house on rent or purchase it.
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Annexure-1
PAYMENT SCHEDULE FOR A LOAN OF 32 LAKH
No Month/yearPayment Due
(Rs.)Interest (Rs.) Principal (Rs.) Balance (Rs.)
1 Apr-12 33030 29333 3697 3196303
2 May-12 33030 29299 3731 3192573
3 Jun-12 33030 29265 3765 3188808
4 Jul-12 33030 29231 3799 3185009
5 Aug-12 33030 29196 3834 3181175
6 Sep-12 33030 29161 3869 3177305
7 Oct-12 33030 29125 3905 3173401
8 Nov-12 33030 29090 3941 3169460
9 Dec-12 33030 29053 3977 3165483
10 Jan-13 33030 29017 4013 3161470
11 Feb-13 33030 28980 4050 3157420
12 Mar-13 33030 28943 4087 3153333Total for FY12-13 349694 46667
13 Apr-13 33030 28906 4124 3149209
14 May-13 33030 28868 4162 3145047
15 Jun-13 33030 28830 4200 3140846
16 Jul-13 33030 28791 4239 3136607
17 Aug-13 33030 28752 4278 3132329
18 Sep-13 33030 28713 4317 3128012
19 Oct-13 33030 28673 4357 3123656
20 Nov-13 33030 28634 4397 3119259
21 Dec-13 33030 28593 4437 3114823
22 Jan-14 33030 28553 4477 3110345
Annexure to Problem Statement
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Annexure-1
No Month/yearPayment Due
(Rs.)Interest (Rs.) Principal (Rs.) Balance (Rs.)
39 Jun-15 33030 27801 5229 3027630
40 Jul-15 33030 27753 5277 302235341 Aug-15 33030 27705 5325 3017028
42 Sep-15 33030 27656 5374 3011654
43 Oct-15 33030 27607 5423 3006231
44 Nov-15 33030 27557 5473 3000758
45 Dec-15 33030 27507 5523 2995235
46 Jan-16 33030 27456 5574 2989662
47 Feb-16 33030 27405 5625 2984037
48 Mar-16 33030 27354 5676 2978360
Total for FY15-16 331546 64814
49 Apr-16 33030 27302 5728 2972632
50 May-16 33030 27249 5781 2966851
51 Jun-16 33030 27196 5834 2961017
52 Jul-16 33030 27143 5887 2955130
53 Aug-16 33030 27089 5941 2949188
54 Sep-16 33030 27034 5996 2943193
55 Oct-16 33030 26979 6051 2937142
56 Nov-16 33030 26924 6106 2931036
57 Dec-16 33030 26868 6162 2924874
58 Jan-17 33030 26811 6219 2918655
59 Feb-17 33030 26754 6276 2912379
60 Mar-17 33030 26697 6333 2906046
Total for FY16-17 324046 72314
61 Apr-17 33030 26639 6391 2899655
62 May-17 33030 26580 6450 2893205
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Annexure-1
No Month/yearPayment Due
(Rs.)Interest (Rs.) Principal (Rs.) Balance (Rs.)
84 Mar-19 33030 25146 7884 2735344
85 Apr-19 33030 25074 7956 272738886 May-19 33030 25001 8029 2719359
87 Jun-19 33030 24927 8103 2711257
88 Jul-19 33030 24853 8177 2703080
89 Aug-19 33030 24778 8252 2694828
90 Sep-19 33030 24703 8327 2686500
91 Oct-19 33030 24626 8404 2678097
92 Nov-19 33030 24549 8481 2669616
93 Dec-19 33030 24471 8559 2661057
94 Jan-20 33030 24393 8637 2652420
95 Feb-20 33030 24314 8716 2643704
96 Mar-20 33030 24234 8796 2634908
97 Apr-20 33030 24153 8877 2626031
98 May-20 33030 24072 8958 2617073
99 Jun-20 33030 23990 9040 2608033
100 Jul-20 33030 23907 9123 2598910
101 Aug-20 33030 23823 9207 2589703
102 Sep-20 33030 23739 9291 2580412
103 Oct-20 33030 23654 9376 2571036
104 Nov-20 33030 23568 9462 2561574
105 Dec-20 33030 23481 9549 2552025
106 Jan-21 33030 23394 9636 2542388
107 Feb-21 33030 23305 9725 2532664
108 Mar-21 33030 23216 9814 2522850
109 Apr-21 33030 23126 9904 2512946
110 May-21 33030 23035 9995 2502951
111 Jun-21 33030 22944 10086 2492865
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Annexure-1
No Month/yearPayment Due
(Rs.)Interest (Rs.) Principal (Rs.) Balance (Rs.)
133 Apr-23 33030 20701 12329 2246002
134 May-23 33030 20588 12442 2233560135 Jun-23 33030 20474 12556 2221004
136 Jul-23 33030 20359 12671 2208334
137 Aug-23 33030 20243 12787 2195547
138 Sep-23 33030 20126 12904 2182642
139 Oct-23 33030 20008 13022 2169620
140 Nov-23 33030 19888 13142 2156478
141 Dec-23 33030 19768 13262 2143216
142 Jan-24 33030 19646 13384 2129832
143 Feb-24 33030 19523 13507 2116325
144 Mar-24 33030 19400 13630 2102695
145 Apr-24 33030 19275 13755 2088940
146 May-24 33030 19149 13881 2075058
147 Jun-24 33030 19021 14009 2061050
148 Jul-24 33030 18893 14137 2046913
149 Aug-24 33030 18763 14267 2032646
150 Sep-24 33030 18633 14397 2018248
151 Oct-24 33030 18501 14529 2003719
152 Nov-24 33030 18367 14663 1989056
153 Dec-24 33030 18233 14797 1974259
154 Jan-25 33030 18097 14933 1959327
155 Feb-25 33030 17961 15070 1944257
156 Mar-25 33030 17822 15208 1929050
157 Apr-25 33030 17683 15347 1913702
158 May-25 33030 17542 15488 1898215
159 Jun-25 33030 17400 15630 1882585
160 Jul-25 33030 17257 15773 1866812
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Annexure-1
No Month/yearPayment Due
(Rs.)Interest (Rs.) Principal (Rs.) Balance (Rs.)
182 May-27 33030 13750 19280 1480767
183 Jun-27 33030 13574 19456 1461311184 Jul-27 33030 13395 19635 1441676
185 Aug-27 33030 13215 19815 1421861
186 Sep-27 33030 13034 19996 1401865
187 Oct-27 33030 12850 20180 1381686
188 Nov-27 33030 12665 20365 1361321
189 Dec-27 33030 12479 20551 1340770
190 Jan-28 33030 12290 20740 1320030
191 Feb-28 33030 12100 20930 1299100
192 Mar-28 33030 11908 21122 1277979
193 Apr-28 33030 11715 21315 1256664
194 May-28 33030 11519 21511 1235153
195 Jun-28 33030 11322 21708 1213445
196 Jul-28 33030 11123 21907 1191538
197 Aug-28 33030 10922 22108 1169431
198 Sep-28 33030 10720 22310 1147120
199 Oct-28 33030 10515 22515 1124606
200 Nov-28 33030 10309 22721 1101885
201 Dec-28 33030 10101 22929 1078955
202 Jan-29 33030 9890 23140 1055816
203 Feb-29 33030 9678 23352 1032464
204 Mar-29 33030 9464 23566 1008898
205 Apr-29 33030 9248 23782 985116
206 May-29 33030 9030 24000 961116
207 Jun-29 33030 8810 24220 936897
208 Jul-29 33030 8588 24442 912455
209 Aug-29 33030 8364 24666 887789
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Annexure-1
No Month/yearPayment Due
(Rs.)Interest (Rs.) Principal (Rs.) Balance (Rs.)
231 Jun-31 33030 2881 30149 284091
232 Jul-31 33030 2604 30426 253665
233 Aug-31 33030 2325 30705 222960
234 Sep-31 33030 2044 30986 191974
235 Oct-31 33030 1760 31270 160704
236 Nov-31 33030 1473 31557 129147
237 Dec-31 33030 1184 31846 97301
238 Jan-32 33030 892 32138 65163
239 Feb-32 33030 597 32433 32730
240 Mar-32 33030 300 32730 0
(Source : EMI calculator on www.loanwala.com)
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Year
Rent after Taxes*
(Rs)
Discounting Rate for
PVF ** PVF ** Total PV (Rs)
1 116088 9.54 0.9523 110,551
2 124380 9.52 0.9108 113,285
3 132672 9.49 0.8721 115,703
4 140964 9.46 0.8361 117,860
5 149256 9.43 0.8023 119,748
577,147
* For details, Please refer Working Note 1
** For details, Please refer Working Note 2
I. PV of Cash Outflows under Rent alternative
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Year EMI (Rs)Loan repaymnet
for the year (Rs)
Tax Advantage on
interest * (Rs)
Loss of interest due
to withdrawal of PF #
(Rs)
Net cash
Outflows (Rs)PVF * Total PV (Rs)
A B=A x 12 C D E=B-C+D F G=E x F
1 33,030 396,360 46,350 89,256 439,266 0.9523 418,313
2 33,030 396,360 46,350 96,840 446,850 0.9108 406,991
3 33,030 396,360 46,350 105,072 455,082 0.8721 396,877
4 33,030 396,360 46,350 114,000 464,010 0.8361 387,959
5 33,030 396,360 46,350 123,684 473,694 0.8023 380,045
Less PV of Profit on Sale value of house at the end of 5 years (1920954*0.8023) @ 1,541,181
Add : PV of Tax Liability due to Long Term Capital Gains @ 107,964
556,968
Mr Badlikar's Annual saving through PF is more than one lakh. Therefore no tax rebate shall be applicable for the Principal amount
* For details, please refer Working Note 2
# For details, please refer Working Note 3
@ For details, please refer Working Note 4
Since the PV of cash outflow in Borrow & Buying Option is less than Rent Option, therefore Mr Badlikar should buy the house
by taking a loan from the bank. The house may be disposed off at the end of his tenure in Chandigarh
II. PV of Cas Outflows under Buying Alternative
III. Recommendation
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Working Note 1
Mr Badlikar's taxable salary in 30% bracket is more than 5 lakh (given), and the amount of House
rent payable is much less than 5 Lakh (as shown below), therefore he will enjoy a tax rebate
in the highest income tax bracket for the full house rent paid
Month House Rent Paid Tax Saving (@30%+3% Edu Cess) Rent After Taxes
1 14000 4326 9674
2 14000 4326 9674
3 14000 4326 9674
4 14000 4326 9674
5 14000 4326 9674
6 14000 4326 9674
7 14000 4326 9674
8 14000 4326 9674
9 14000 4326 9674
10 14000 4326 9674
11 14000 4326 9674
12 14000 4326 9674
Total for the year 1 168000 51912 116088
13 15000 4635 10365
14 15000 4635 10365
15 15000 4635 10365
16 15000 4635 10365
17 15000 4635 10365
18 15000 4635 10365
19 15000 4635 10365
20 15000 4635 10365
21 15000 4635 10365
22 15000 4635 10365
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Working Note 1
Month House Rent Paid Tax Saving (@30%+3% Edu Cess) Rent After Taxes
23 15000 4635 10365
24 15000 4635 10365
Total for the year 2 180000 55620 124380
25 16000 4944 11056
26 16000 4944 11056
27 16000 4944 11056
28 16000 4944 11056
29 16000 4944 11056
30 16000 4944 11056
31 16000 4944 11056
32 16000 4944 11056
33 16000 4944 11056
34 16000 4944 11056
35 16000 4944 11056
36 16000 4944 11056
Total for the year 3 192000 59328 132672
37 17000 5253 11747
38 17000 5253 11747
39 17000 5253 11747
40 17000 5253 11747
41 17000 5253 11747
42 17000 5253 11747
43 17000 5253 11747
44 17000 5253 11747
45 17000 5253 11747
46 17000 5253 11747
47 17000 5253 11747
48 17000 5253 11747
Total for the year 4 204000 63036 140964
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Working Note 1
Month House Rent Paid Tax Saving (@30%+3% Edu Cess) Rent After Taxes
49 18000 5562 12438
50 18000 5562 12438
51 18000 5562 12438
52 18000 5562 12438
53 18000 5562 12438
54 18000 5562 12438
55 18000 5562 12438
56 18000 5562 12438
57 18000 5562 12438
58 18000 5562 12438
59 18000 5562 12438
60 18000 5562 12438
Total for the year 5 216000 66744 149256
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Working Note 2
The amount of interest payment varies from year to year, but the tax rebate is available on Rs. 1,50,000
or actual interest payment, whichever is less.
From the payment schedule, it is evident that the interest payment in first five years is always more than Rs 1,50,000.
Therefore, tax rebate on the interest is available only on Rs 1,50,000.
Since the ratio of tax saving to the interest paid shall vary each year, therefore, cost of debt after taxes will
also vary from year to year.
Extrapolated PVF at the cost of Debt
Year1 Year2 Year3 Year4 Year5 Remarks
A Interest paid during the year 349,694 344,294 338,268 331,546 324,046 As per payment Schedule
B Amount of Interst Eligible for Tax Rebate 150,000 150,000 150,000 150,000 150,000
C Tax Advantage on Interest (B x 0.309) 46,350 46,350 46,350 46,350 46,350 **
D Cost of Debt after taxes [11%(1-C/A) 9.54 9.52 9.49 9.46 9.43
E PVF at 9% (monthly payment table) 0.955 0.915 0.878 0.843 0.81 ##
F PVF at 10% (monthly payment table) 0.95 0.907 0.866 0.828 0.792
G
Extrapolated PVF at the cost of Debt after
taxes 0.9523 0.9108 0.8721 0.8361 0.8023 Explained below
** Since Mr Badlikar's taxable salary in 30% bracket is more than 5 lakh, he will enjoy a tax rebate in the highest
income tax bracket for full Rs. 1,50,000
## The rent is to be paid at the end of each month, we will use the PV table for monthly payments
Extrapolating the PVF at the cost of debt
PVF at 9% (from monthly payment table) 0.955
PVF at 10% (from monthly payment table) 0.95
Difference in PVF per 1% change in discounting rate 0.005
Cost of Debt in Y1 9.54
Extrapolation is required for additional 0.54% 0.955 - (0.955-0.95) * 0.54
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Working Note 3
Interest Schedule on amount withdrawn
from Provident fund to purchase the flat
Month Amount (Rs) Interest Rate Interest (Rs)
1 1,050,000 8.50% 7,438
2 1,050,000 8.50% 7,438
3 1,050,000 8.50% 7,438
4 1,050,000 8.50% 7,438
5 1,050,000 8.50% 7,438
6 1,050,000 8.50% 7,438
7 1,050,000 8.50% 7,438
8 1,050,000 8.50% 7,438
9 1,050,000 8.50% 7,438
10 1,050,000 8.50% 7,438
11 1,050,000 8.50% 7,438
12 1,050,000 8.50% 7,438
89,256 Add this to Next Year Pricipal
13 1,139,256 8.50% 8,070
14 1,139,256 8.50% 8,070
15 1,139,256 8.50% 8,070
16 1,139,256 8.50% 8,07017 1,139,256 8.50% 8,070
18 1,139,256 8.50% 8,070
19 1,139,256 8.50% 8,070
20 1,139,256 8.50% 8,070
21 1,139,256 8.50% 8,070
22 1,139,256 8.50% 8,070
23 1,139,256 8.50% 8,070
24 1,139,256 8.50% 8,070
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Working Note 3
Month Amount (Rs) Interest Rate Interest (Rs)
96,840 Add this to Next Year Pricipal
25 1,236,096 8.50% 8,75626 1,236,096 8.50% 8,756
27 1,236,096 8.50% 8,756
28 1,236,096 8.50% 8,756
29 1,236,096 8.50% 8,756
30 1,236,096 8.50% 8,756
31 1,236,096 8.50% 8,756
32 1,236,096 8.50% 8,756
33 1,236,096 8.50% 8,756
34 1,236,096 8.50% 8,756
35 1,236,096 8.50% 8,75636 1,236,096 8.50% 8,756
105,072 Add this to Next Year Pricipal
37 1,341,168 8.50% 9,500
38 1,341,168 8.50% 9,500
39 1,341,168 8.50% 9,500
40 1,341,168 8.50% 9,500
41 1,341,168 8.50% 9,500
42 1,341,168 8.50% 9,500
43 1,341,168 8.50% 9,50044 1,341,168 8.50% 9,500
45 1,341,168 8.50% 9,500
46 1,341,168 8.50% 9,500
47 1,341,168 8.50% 9,500
48 1,341,168 8.50% 9,500
114,000 Add this to Next Year Pricipal
49 1,455,168 8.50% 10,307
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Working Note 3
Month Amount (Rs) Interest Rate Interest (Rs)
50 1,455,168 8.50% 10,307
51 1,455,168 8.50% 10,307
52 1,455,168 8.50% 10,30753 1,455,168 8.50% 10,307
54 1,455,168 8.50% 10,307
55 1,455,168 8.50% 10,307
56 1,455,168 8.50% 10,307
57 1,455,168 8.50% 10,307
58 1,455,168 8.50% 10,307
59 1,455,168 8.50% 10,307
60 1,455,168 8.50% 10,307
123,684
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Working Note 4
Value of the House at the beginning of the
year Appreciation during the year @8% **
Appreciated value at the end of
the year
Year 1 4000000 320000 4320000
Year 2 4320000 346000 4666000
Year 3 4666000 373000 5039000
Year 4 5039000 403000 5442000
Year 5 5442000 435000 5877000
** rounded off to nearest thousand
Principal Amount Paid in Year 1 46667
Principal Amount Paid in Year 2 52067
Principal Amount Paid in Year 3 58092
Principal Amount Paid in Year 4 64814
Principal Amount Paid in Year 5 72314
Total Principal Amount Paid in 5 Years 293954
A Sale value of the House 5877000
B Amount of Loan taken from the Bank 3200000
C
Balance amount of Principal amount to be
returned to Bank 2906046
D
Amount to be deposited back to Own
Sources 1050000
E Profit (A-C-D) 1920954
Chane in Cost inflation Index every year
wrt previous year 6%
Indexation Factor in 5th year 1.34
Indexed Cost of Acquisition 5352902
Long Term Capital Gains 524098 Sale Value - Indexed cost of acquisition
Tax Liability on Capital gains 107964