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New Labour Code: How House Rent Allowance changes could impact your rent versus buy property decision

09 Apr 2026

The new labour code may reshape salary structures and influence a key life decision, whether salaried professionals choose to rent or buy a home | Real Estate News
New Labour Code: How House Rent Allowance changes could impact your rent versus buy property decision

New Labour Code Shifts Focus from Renting to Home Buying

Neha Sharma, a 32-year-old marketing professional in Bengaluru, is facing a financial dilemma. As her House Rent Allowance (HRA) benefits and tax savings dwindle due to the new wage structure, she is considering buying a house.

The Impact of the New Labour Code

  • The new labour code redefines wages, with basic pay constituting at least 50% of total compensation.
  • This change increases contributions toward the provident fund and gratuity, but compresses allowances, including HRA.

ā€œProvident Fund contributions increase, reducing immediate take-home pay. For middle- to high-income earners, this translates into a subtle but meaningful erosion of tax efficiency. The result: renting is no longer as tax-friendly as it once was," said Ruchika Bhagat, MD, Neeraj Bhagat and Co.

Changes in Tax Efficiency

  • As HRA is part of the allowances that need to be limited to within 50% of the CTC, there may be possible CTC restructuring by employers to reduce the percentage of HRA in the CTC.
  • This will directly compress the tax-efficient HRA benefit across salary brackets,ā€ said Debjani Aich, Partner, CMS INDUSLAW.

ā€œWith reduced HRA benefits, the effective cost of renting increases. At the same time, tax benefits on home loans, up to ā‚¹2 lakh on interest and ā‚¹1.5 lakh on principal repayment, remain unchanged. This makes home ownership relatively more appealing from a tax perspective,ā€ said Bhagat.

The Decision to Buy or Rent

  • Buying a home works more efficiently for long-term capital creation over immediate tax benefits, especially in cases where the individual looks at building equity over liquidity.
  • However, renting offers flexibility, liquidity, and freedom from long-term debt, advantages that are especially valuable for young professionals or those with dynamic careers.

ā€œRenting is a more efficient structure for individuals who require higher liquidity and related flexibility of income. Buying a home works more efficiently for long-term capital creation over immediate tax benefits,ā€ added Aich.

Long-Term Financial Planning

The new labour codes, in effect, are nudging individuals toward long-term financial planning. With higher provident fund contributions and reduced scope for tax arbitrage through allowances, the focus is shifting from short-term tax savings to long-term wealth creation.