How much of salary should you spend on rent?

Many people who leave their homes  to work in a different city, face the challenge of finding a house on rent. Over the last 1-1.5 years, the graph of rentals in the country has gone up sharply. And this uptick is not limited to just big cities. The entire country is experiencing a rise in rental prices, either big or small. Excessive expenditure on rent can prove harmful to your overall finances.
To save yourself from this, it is essential to know how much of your salary you should spend on paying rent. But before this, let’s take a look at how much house rentals have risen.
As per a recent report by property consultant Anarock, in the 9 months between January and September, 2023, rents have risen by as much as 30% in 7 major cities of the country. The highest jump has been recorded in Hyderabad, Pune and Bengaluru. At 31%, Whitefield, located in IT hub Bengaluru, saw the highest jump in rental prices. Towards the end of 2022, a 2BHK in this area was available for Rs 22,500. By September 2023, the same house asked for Rs 29,400 as rent. In 9 months, the rent climbed up by Rs 6,900.

Similarly, in NCR’s Sohna road, the rental for a 2BHK at the end of 2022 was Rs 28,500. This increased to Rs 31,500 in September, 2023. Rents in Noida Sector 150 jumped 13%, from Rs 19,000 to Rs 21,500, and 14% in Dwarka, inching up from Rs 22,000 to Rs 25,000.

Due to offices reopening post Covid-19 pandemic, rise in property prices and mismatch in property demand and supply, rent prices have gone up. Moreover, owners who could not raise rent demands during Covid-19 began doing so at a rapid pace. This is why tenants are forced to pay a higher amount as rent. In such a case, you should know how much money to set aside from your salary, for your house’s rent.

Let’s understand this through a calculation. If you have a monthly salary of Rs 60,000, the rent should not be more than 30% of it i.e. not more than Rs 18,000. Note that this should be inclusive of house rent, maintenance, electricity and water bill.

If your rent payable is higher than this level, this means you are cutting down on other crucial expenses, or even compromising on your financial goals. This is because most of your salary is going towards paying your rent. Hence, you are unable to sufficiently save for buying a house, your child’s education, or your retirement. This clearly implies that paying higher rents can severely dent your future financial planning. So, it is advisable to keep your rental liabilities within the 30% range.

Before finalizing your rental house, decide where you want to live. Check if the security is adequate at this location, and how far is your office from your home? That’s because even if you find a decent house within your budget, it could prove expensive if it is far from your place. Moreover, it will also add to your travel expenses and time. Choose a house that’s closer to your office, even if it is a bit expensive, or small, since that will prove to be a better option.

For salaried individuals, a portion of their monthly income is marked as HRA, or House Rent Allowance. If you live in a rented accommodation and get HRA from your company, you can claim tax exemption on the rent paid. The calculation of exemption will depend on 3 factors
1. Amount received as HRA
2. Metro cities : 50% of basic salary ; Non-metro cities : 40% of basic salary
3. Annual rent – 10% of basic salary
The lowest of these 3 amounts will be eligible for exemption. That is why it is advisable to calculate your HRA well in advance, and keep your actual rent close to it.

If you are also looking for rental accommodation, don’t forget the 30% formula. Many people, who’ve recently gained employment, think it is okay to spend 40-50% of their salary on rent. After all, they are still saving 50% of their salary.

But remember that while rent will consistently increase at an annual rate of 10%, your salary might not follow suit. This will increase your rental pressure, and disrupt your future savings and investments. You can also think of having a flatmate to equally divide the rental burden. If you see anyone living luxuriously on rent, do not blindly follow suit, since this could backfire and prove harmful for you