News: Smaller HRA Under Labour Code May Tilt Rent-or-Buy to Owning-09-04-2026

The new Labour Code could change how salaried professionals weigh renting against buying a home, because the way it defines wages is expected to shrink House Rent Allowance (HRA) and the tax saving that comes with it.

Under the code, basic pay is expected to form at least 50% of total compensation. That raises contributions to provident fund and gratuity but squeezes allowances, HRA among them. Since the exempt portion of HRA is linked to salary and rent parameters, it falls as well.

Consider Neha Sharma, 32, a marketing professional in Bengaluru whose rent now takes nearly 30% of her income. With her HRA benefit and tax savings reduced under the new wage structure, she is examining whether EMIs on a purchased home would be comparable, while also weighing stability, tax benefits and the chance to build equity.

Ruchika Bhagat, MD, Neeraj Bhagat and Co, an integrated finance management firm, said higher provident fund contributions cut immediate take-home pay, and for middle- to high-income earners the result is a subtle but meaningful loss of tax efficiency. Renting, she said, is no longer as tax-friendly as before.

Debjani Aich, Partner, CMS INDUSLAW, said that since HRA is among the allowances to be kept within 50% of the CTC (cost to company), employers may restructure pay to lower its share, which would directly compress the benefit across salary brackets.

For years a generous HRA exemption made renting financially attractive even in expensive cities. Bhagat said the effective cost of renting now rises, while tax benefits on home loans, up to Rs 2 lakh on interest and Rs 1.5 lakh on principal repayment, are unchanged, making ownership relatively more appealing from a tax angle. These benefits, however, are available only under the old tax regime, which may not suit everyone.

Tax should not be the only factor, but experts said buying begins to make financial sense when rent exceeds 25-30% of income, since the outgo is large and builds no equity. It is also more viable when the buyer expects to stay beyond 7-10 years, so that costs even out. In cities with low rental yields, such as Mumbai or Delhi, purchasing often becomes the stronger choice earlier.

Bhagat pointed out that renting offers flexibility, liquidity and freedom from long-term debt, which matter to young professionals and those with dynamic careers, whereas buying enforces disciplined saving and creates a tangible asset.

With higher provident fund contributions and less room for tax arbitrage through allowances, the labour codes are effectively nudging people from short-term tax saving towards long-term wealth creation.

Aich said that in a lower-HRA regime renting remains the more efficient structure for those who need higher liquidity and income flexibility, while buying works better for long-term capital creation, particularly for those who value building equity over liquidity.