Investing in Real Estate v/s Bank Deposits
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30 April 2019 - 8:00, by , in NRI, No comments

Real Estate, if purchased wisely, can provide post-tax returns much better than Bank Deposits and is a very good investment option for those wanting to accumulate wealth over a long term period of 20–30 years.

If you are going to purchase a ready to occupy 2 BHK flat in Pune/Bengaluru in a locality with existing/proposed good social infrastructure, making 20% down payment and taking a loan on the balance amount @ 8.5% interest for 10 years, let us consider an example:

Long term cost inflation = 5% p.a.
Long term Real Estate appreciation = 6% p.a.
Flat internal area = 700 sq.ft
Sale Rate = INR 6000/sq.ft
Sale Price = INR 42 lakhs
Total Price (after 6% Stamp Duty + 2% Brokerages, etc.) = INR 45.4 lakhs
Rental yield @ 3.5%, earns you an annual rent of INR 1.47 lakhs, increasing at 6% p.a.
Annual maintenance & taxes @ 1.75%, costs you INR 73,500 increasing at 5% p.a.
EMI for 10 years @ 8.5% interest = INR 45,000

Flat Internal Area (2BHK) 700 Sq. ft.
Sale Rate 6000 INR/sq. ft.
Cost excluding tax 42,00,000 Price
Total cost including taxes 45,36,000 8%
Annual Rent 3.5% Of Price
Annual Maintenance 1.75% Of Price
Long Term Cost Inflation 5% p.a
Real Estate Appreciation 6% p.a
Down Payment 9,07,200 20%
Loan @8.5% 36,28,800 80%
EMI for 10 years 45,000  


After 10 years, your real estate investment will have positive cash flows and you will break even after 30 years. But, if you sell the house after 30 years, then you will be able to net overall returns of 7.4% pre-tax.

Considering the various Income Tax benefits given towards home loan repayment and long term capital gain benefits, the post-tax returns will be upwards of 7%, which is much better than post-tax returns of 5% from Fixed/Recurring Deposits at any large public sector bank.

After 30 years, your investment of INR 45 lakhs would be worth INR 2.28 Crores, giving you an internal rate of return (IRR) of 7.4% before taxes.

Value of Home after 30 Years 2,27,57,229
Net Cash after Sale 2,31,88,327
IRR for 30 Years 7.4%


In case, you want to know the effect of change in the inflation and real estate appreciation on the IRR, then it is as follows:

IRR Scenarios (Cost Inflation v/s Real Estate Appreciation)
7.4% 4.0% 5.0% 6.0% 7.0% 8.0%
4.0% 4.8% 4.5% 4.2% 3.7% 3.2%
5.0% 6.2% 6.0% 5.7% 5.4% 4.9%
6.0% 7.6% 7.4% 7.2% 6.9% 6.5%
7.0% 9.0% 8.8% 8.6% 8.3% 8.1%
8.0% 10.3% 10.1% 10.0% 9.8% 9.5%
9.0% 11.6% 11.5% 11.3% 11.1% 10.9%
10.0% 12.9% 12.8% 12.6% 12.5% 12.3&


As you can see from the table above, in case your real estate investment appreciates @ 8% p.a. and averaged inflation is 6% p.a., then your IRR will be as high as 10.0% p.a.

As you can observe from the calculations above, Real Estate in India is a good avenue for investment for those wanting to beat inflation & grow their wealth in the long term. With the advent of Real Estate (Regulation and Development) Act, 2016 this sector will witness greater transparency and regulated supply, leading to positive sentiments for investment.

  1. There will always be opportunities to make short term multi-fold returns in Real Estate, but that is true for any asset in general.
  2. It is unlikely that in the long term, Real Estate appreciation will beat returns from stock market, but it is highly likely that it will beat inflation, hence Inflation<Real Estate<Equities for the long term investor.
  3. Long term Real Estate returns in upcoming metro cities like Pune, Bengaluru, etc. will always be higher than existing metros like Mumbai, Delhi, etc.
  4. The Income Tax benefits for Real Estate will change every year with every Budget, but the benefits will always be more compared to Interest received from Bank Deposits.
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