Neha Sharma, 32, a marketing professional in Bengaluru, has been renting an apartment where the rent now accounts for nearly 30% of her income. With the new wage structure reducing her House Rent Allowance (HRA) benefits and tax savings, she is reassessing her finances. She is now considering buying a house, evaluating whether EMIs would be comparable, while also weighing long-term stability, tax benefits, and the opportunity to build equity.
One key thing that may change
The new Labour Code is expected to reshape the way salaried professionals structure their income and, more importantly, how they make one of life’s biggest financial decisions: whether to rent or buy a home.
At the heart of this shift lies a seemingly technical change: the redefinition of wages. Under the new labour code, basic pay is expected to constitute at least 50% of total compensation. While this increases contributions toward the provident fund and gratuity, it simultaneously compresses allowances, including the House Rent Allowance (HRA), which has long been a key tax-saving component for salaried individuals.
The hidden impact on your take-home salary
HRA has traditionally allowed employees to reduce taxable income, especially in metro cities where rental expenses are high. However, with a higher basic salary, the HRA component shrinks due to a capped allowance structure. The exempt portion reduces, as it is linked to salary and rent parameters.
“Provident Fund contributions increase, reducing immediate take-home pay. For middle- to high-income earners, this translates into a subtle but meaningful erosion of tax efficiency. The result: renting is no longer as tax-friendly as it once was,” said Ruchika Bhagat, MD, Neeraj Bhagat and Co, an integrated finance management firm.
“As HRA is part of the allowances that need to be limited to within 50% of the CTC (cost to company), there may be possible CTC restructuring by employers to reduce the percentage of HRA in the CTC. This will directly compress the tax-efficient HRA benefit across salary brackets,” said Debjani Aich, Partner, CMS INDUSLAW.
Does this change the rent-versus-buy property equation?
For years, the decision to rent versus buy property was not just about lifestyle; it was also about tax optimisation. A generous HRA exemption often made renting financially attractive, even in expensive cities. That equation is now shifting.
Also Read: RBI holds repo rate steady at 5.25%: What it means for new and existing home loan borrowers
“With reduced HRA benefits, the effective cost of renting increases. At the same time, tax benefits on home loans, up to ₹2 lakh on interest and ₹1.5 lakh on principal repayment, remain unchanged. This makes home ownership relatively more appealing from a tax perspective,” said Bhagat. However, one needs to remember that the tax benefits are available only under the old tax regime, which may not make sense for everyone.
When buying starts making sense
While tax benefits alone should not drive the decision, the balance is clearly tilting in favour of ownership under certain conditions. Buying a home begins to make financial sense when rent exceeds 25–30% of income, as the outflow becomes significant without building any equity.
It is also more viable when the expected stay horizon extends beyond 7–10 years, allowing costs to even out over time. Additionally, in cities with low rental yields, such as Mumbai or Delhi, purchasing often becomes a stronger financial decision earlier, experts said.
Beyond tax: The bigger financial picture
That said, the decision cannot be reduced to tax savings alone.
“Renting offers flexibility, liquidity, and freedom from long-term debt, advantages that are especially valuable for young professionals or those with dynamic careers. Buying, on the other hand, enforces disciplined savings and builds a tangible asset over time,” said Bhagat.
Also Read: Income Tax changes 2026: From April 1, HRA rules require disclosure of rent paid to father
The new labour codes, in effect, are nudging individuals toward long-term financial planning. With higher provident fund contributions and reduced scope for tax arbitrage through allowances, the focus is shifting from short-term tax savings to long-term wealth creation.
The bottom line
As HRA benefits shrink, individuals must reassess their housing choices through a broader lens, one that balances cash flow, financial goals, and lifestyle needs.
“In a lower-HRA regime, renting is a more efficient structure for individuals who require higher liquidity and related flexibility of income. Buying a home works more efficiently for long-term capital creation over immediate tax benefits, especially in cases where the individual looks at building equity over liquidity,” added Aich.
Anagh Pal is a personal finance expert who writes on real estate, tax, insurance, mutual funds and other topics.
