How to Calculate Real ROI on Rental Property in India — Beyond the Gross Yield
Real estate agents will tell you about "rental yield" — dividing annual rent by property price. But gross yield hides the real story. Once you subtract vacancy periods, society maintenance, property tax, repairs, and income tax on rent, the net yield in most Indian cities is a surprisingly low 1.5–2.5%. Here's how to calculate the real number for any property you're evaluating.
The Gross Yield Illusion
An ₹80 lakh flat renting at ₹25,000/month looks like: ₹3,00,000 annual rent ÷ ₹80,00,000 = 3.75% gross yield. This is what brokers show you. Here's the net yield calculation:
| Income / Expense | Annual Amount |
|---|---|
| Gross rent (₹25,000 × 12) | +₹3,00,000 |
| Vacancy allowance (1.5 months/year average) | −₹37,500 |
| Society maintenance (owner's share) | −₹18,000 |
| Property tax (Bengaluru BBMP, approx) | −₹12,000 |
| Repairs and painting (amortised over 5 years) | −₹15,000 |
| Broker fee (1 month/year, amortised) | −₹25,000 |
| Net rental income before tax | ₹1,92,500 |
| Income tax on rent (30% bracket, 30% standard deduction) | −₹40,425 |
| Net rental income after tax | ₹1,52,075 |
| True net rental yield | 1.9% |
The gross yield of 3.75% becomes 1.9% net. On an ₹80 lakh property, you're making ₹12,673/month in net income — after all real costs and taxes.
The Total Return Picture — Capital Appreciation + Yield
Rental properties earn two ways: current income (yield) and capital appreciation. The total return equation:
Total ROI = Net Rental Yield + Capital Appreciation Rate
At 1.9% yield + 5% annual appreciation (moderate Bengaluru assumption), total return = 6.9%. Compare this with: equity mutual funds historically at 12–13%, PPF at 7.1% (guaranteed, tax-free), NPS equity at 13–17%. The advantage of real estate is the leverage — if you've financed the property with a 20% down payment, your return on equity is amplified.
When Rental Property Makes Financial Sense
- You're buying in a high-growth corridor (near IT parks, metro lines, new employment hubs) where appreciation is likely 7%+
- You're using significant leverage (70–80% loan) and rental income covers most of the EMI
- You have a long hold horizon (10+ years) to benefit from both appreciation and rental growth
- The property is in a city with strong rental demand (Bengaluru, Hyderabad, Pune) and low vacancy
Tax on Rental Income — How It Works
Rental income is taxed as "Income from House Property." You get a standard deduction of 30% of Net Annual Value (NAV) — automatically, no bills needed. Municipal tax paid is also deductible. Home loan interest (if applicable) is deductible under Section 24(b) — for let-out property, there's no ₹2 lakh cap (unlike self-occupied). This makes the tax calculation more favourable than it first appears.
FAQ
What is a good rental yield in India?
A gross yield above 4% is considered good in India. Net yield above 2.5% is excellent. Most metro markets (Mumbai, Delhi) are 1.5–2.5% gross; secondary markets (Ahmedabad, Jaipur, Coimbatore) sometimes reach 4–5% gross — but with lower appreciation potential.
Is rental income from NRI-owned property taxable in India?
Yes. Rental income from Indian property is taxable in India regardless of the owner's residency status. TDS at 31.2% is deducted by the tenant if the owner is an NRI. The NRI files an ITR and can claim refunds/adjustments.
Can I claim depreciation on rental property?
The 30% standard deduction already accounts for wear and tear — you cannot separately claim depreciation on residential rental property under Indian tax law. Commercial property treated as business income can claim depreciation.
