House Rent or Buy Decision

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    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