What you will learn: how to turn an advertised rent and a price-growth story into the return a rented flat actually delivers, after purchase costs, running costs, vacancy, tax on rent and tax on sale, and how to test that return against bad years.
Rohan and Shruti Patil (an illustrative profile), 44 and 41, live in their own flat in Pune. They have about ₹88 lakh from matured investments and a bonus. A broker shows them a ₹80 lakh two-bedroom flat in a growing suburb: "rents for ₹22,000 a month, and prices here doubled in ten years." Their real question: what will this flat really earn us, every year and when we sell, after everything?
This lesson is about property bought to rent out. Buying a home to live in, and the rent-versus-buy decision, are in buying a home.
Three numbers people confuse
- Gross rental yield: a year's rent divided by the price. ₹22,000 × 12 = ₹2,64,000, or 3.3% of ₹80 lakh.
- Net rental yield: rent actually received, minus the owner's running costs, divided by everything you put in, including purchase costs.
- Total return: net rent after tax plus the sale proceeds after costs and tax, over the whole holding period, expressed as a yearly rate. The right tool is the internal rate of return (IRR): the yearly rate at which all your outflows and inflows, each on its own date, balance out.
The broker's pitch adds gross yield to price growth. As the example shows, that shortcut overstates the result by a wide margin.
Step 1: count everything you pay to buy
Assumptions (illustrative; actual charges depend on your state, the property and the deal):
| Item | Assumption | Amount |
|---|---|---|
| Agreed price | Ready flat with completion certificate | ₹80,00,000 |
| Stamp duty and registration | 7% of price, assumed for this example | ₹5,60,000 |
| Legal checks and brokerage | 1% of price | ₹80,000 |
| Basic furnishing to let it | Fixed amount, assumed worth nothing at sale | ₹2,00,000 |
| Total cash invested | ₹88,40,000 |
Stamp duty, registration fees, any metro or local cess and concessions are set by each state, and they differ by city and sometimes by the buyer. Check the current rates on your state's registration department website before assuming a number. An under-construction purchase can also attract GST and a longer wait before any rent arrives. The ₹8.4 lakh above ₹80 lakh is gone on day one: if prices did not move and you sold immediately, you would not get it back.
Step 2: from gross rent to net rent
More assumptions for year 1: the flat is empty for one month in every three years (tenants change), and finding a new tenant costs half a month's rent each time; the owner pays society maintenance of ₹3,000 a month, property tax of ₹12,000 a year and repairs of about ₹10,000 a year.
| Line | Amount |
|---|---|
| Scheduled rent (₹22,000 × 12) | ₹2,64,000 |
| Average vacancy (one month in 36) | −₹7,333 |
| Rent actually received | ₹2,56,667 |
| Letting brokerage (half a month in 36) | −₹3,667 |
| Society maintenance | −₹36,000 |
| Property tax | −₹12,000 |
| Repairs | −₹10,000 |
| Net rent before income tax | ₹1,95,000 |
₹1,95,000 on ₹88.4 lakh invested is a net yield of 2.21%, two-thirds of the advertised 3.3%. Some of these costs may be lower for a particular flat; others, like a major repair or a long vacancy, can be much higher in a particular year.
Step 3: tax on the rent
Rent is taxed under the head "income from house property". For tax year 2026–27, under the Income-tax Act, 2025, the working is:
- Annual value: rent received minus municipal (property) tax actually paid by the owner: ₹2,56,667 − ₹12,000 = ₹2,44,667.
- Standard deduction of 30% of annual value: taxable income ₹1,71,267.
- Tax at an assumed 30% slab plus 4% cess (31.2%): ₹53,435.
Two points surprise many owners. The 30% deduction is the allowance for maintenance and repairs: you cannot deduct the actual society charges and repair bills on top of it. And because the deduction is on annual value, not on what you spend, the tax does not fall when your costs rise. After tax, year 1 leaves ₹1,41,565, a post-tax yield of 1.60% on what was invested.
If the flat is bought with a loan, interest on that loan is also deductible from let-out property income, but how much of any resulting loss can be set off against salary depends on the tax regime and statutory limits. The rules are summarised in the further-reading article on rental income tax below; the loan itself is covered in running a home loan.
Step 4: the sale, and the ten-year return
Base-case assumptions: rent and maintenance rise 5% a year, repairs 5%, property tax 3%; vacancy and letting costs as before; the price rises 5% a year; the flat is sold at the end of year 10 with 1% selling brokerage. The gain is long-term (held more than 24 months) and taxed at 12.5% plus cess without indexation; the cost includes the price, stamp duty, registration and purchase brokerage, which must be backed by documents.
- Sale price: ₹80 lakh × 1.0510 = ₹1,30,31,157.
- Capital gain: ₹1,30,31,157 − ₹1,30,312 selling brokerage − ₹86,40,000 cost = ₹42,60,845.
- Tax on the gain: 12.5% × 1.04 = ₹5,53,910. Net sale proceeds: ₹1,23,46,936.
- Post-tax rent over ten years: ₹17,91,035 in total, rising from ₹1,41,565 in year 1 to ₹2,21,926 in year 10.
- IRR on all cash flows: about 5.1% a year.
To see where the IRR comes from, lay the cash flows out by year, exactly as you would in a spreadsheet:
| Year | Cash flow | What it is |
|---|---|---|
| 0 | −₹88,40,000 | Price, stamp duty, registration, legal, brokerage, furnishing |
| 1 | ₹1,41,565 | Net rent after running costs and tax |
| 2 | ₹1,48,831 | Net rent, after rent and costs both rise |
| 3 to 9 | ₹1,56,465 rising to ₹2,11,132 | Net rent each year |
| 10 | ₹1,25,68,862 | Year 10 net rent of ₹2,21,926 plus net sale proceeds of ₹1,23,46,936 |
Almost all the money comes back in a single payment in year 10, which is why the sale price, the one number you cannot know when you buy, dominates the result. A year of high rent or low repairs barely moves it.
The broker's shortcut, 3.3% yield plus 5% growth, suggests 8.3%. The gap of more than three percentage points is made of purchase costs, running costs, vacancy and two layers of tax. With inflation at an assumed 5%, the base case's real return is close to zero: the flat roughly preserves purchasing power and little more.
| Scenario | What changes | Post-tax IRR |
|---|---|---|
| Base case | Price +5% a year | 5.1% |
| A bad tenant year | Base case, but empty for all of year 4 while costs continue | 4.9% |
| Slow market | Price +2% a year | 2.7% |
| Flat market | Price unchanged after ten years | 1.0% |
Price growth drives most of the result; rent alone cannot carry it. That makes the local price outlook the key assumption, and also the one nobody can know. Past price growth in one suburb, often quoted without purchase costs, is not evidence of the next ten years. If the property was bought before 23 July 2024, a transitional rule can limit the tax on the gain by comparing it with 20% on an indexed gain; that comparison and reinvestment reliefs are in capital gains across assets.
What the IRR does not show
- Liquidity. A flat cannot be sold in parts, and a sale usually takes months. A quick sale often means accepting a lower price.
- Concentration. ₹88 lakh in one building, in one suburb, often in the same city as your home and job, is a large single bet.
- Effort and legal risk. Finding and managing tenants, rent agreements, deposits, disputes and title checks take time and money that the numbers above do not include.
- Leverage. A loan reduces the cash you put in and can raise the return on your own money when prices rise, but it magnifies losses in a flat market and adds a fixed EMI to the household budget, whether or not a tenant is paying.
The trade-offs against a liquid portfolio are worked through for one family in real assets vs a liquid portfolio.
Try this: a one-page property test
- Write the all-in purchase cost using your state's actual stamp duty and registration charges.
- Ask two or three local agents for realistic rent, the usual gap between tenants and who pays maintenance.
- Build a year 1 net rent line as in Step 2, then apply the 30% deduction and your slab rate.
- Run three price paths over your holding period: your own guess, 2% a year and flat. Calculate the IRR of each with a spreadsheet's IRR or XIRR function.
- Compare the result with a post-tax return you could expect from a liquid alternative of similar risk, and note the difference in liquidity.
Common questions
Can I claim my society maintenance and repair bills against rent?
Not separately. The 30% standard deduction on annual value is meant to cover them. Only municipal taxes you actually paid reduce the annual value, and loan interest is deducted under its own rule.
Is a 3% rental yield low?
It is a gross figure. After vacancy, running costs and tax, the Patils' flat keeps 1.6% of what they put in. Whether that is acceptable depends on how much price growth you are counting on and how sure you are of it.
Should I compare rent with my EMI?
Not to judge the investment. EMI mixes interest with repayment of your own loan principal. Judge the investment on all cash flows, including the down payment and the eventual sale, with an IRR.
What about fractional ownership platforms?
Platforms that pool investors into commercial property are now brought under SEBI's small and medium REIT framework, with a minimum investment of ₹10 lakh. How REITs work, including that category, is in REITs explained.
Where to go next
- REITs explained: property income in listed units, with different costs and tax.
- Real assets vs a liquid portfolio: this same flat tested inside a household's whole balance sheet.
- Inflation and real returns: why a 5% return can be close to nothing in real terms.
- Further reading: rental income tax: the 30% deduction and loan interest; real estate vs mutual funds.