What Is Rental Yield and Why Does It Matter?
Rental yield is the annual income from a property expressed as a percentage of its purchase price. It answers the key question: how much income does this property generate relative to what you paid for it?
Indian metro markets typically deliver gross yields of 2.5% to 4%, while Tier-2 cities offer 4% to 6%. Gross rental yield = (Annual Rent / Property Value) x 100. A Rs 60 lakh property renting at Rs 18,000/month earns Rs 2,16,000 annually, giving 3.6% gross yield. Net yield adjusts for costs: maintenance typically runs 0.5-1.5% annually, and one month of vacancy per year cuts gross rent by about 8.3%.
With home loan rates at 8.5-9%, Indian metro rental yields of 2.5-3.5% mean leveraged properties typically generate negative monthly cash flow. Investors buy expecting capital appreciation to compensate, making accurate total ROI calculation (yield + appreciation) essential before any purchase decision.
How Is Property ROI Calculated? The Complete Formula
Property ROI over a holding period combines cumulative rental income and capital appreciation at exit:
Example: A Rs 1 crore property with Rs 25,000/month rent, 7% appreciation, and 1.5% annual costs over 10 years yields approximately Rs 27.5 lakh net rental income + Rs 96.7 lakh capital gain = Rs 1.24 crore total profit. That is 124% absolute ROI or about 8.6% annualised CAGR.
Real Return vs Nominal Return: The Fisher Equation Explained
The nominal return is the raw CAGR including rental income and appreciation. The real return strips out inflation to show actual purchasing-power growth. With India's long-run CPI averaging 5-7%, this adjustment is significant.
Precise formula (Fisher equation): Real Return = [(1 + Nominal CAGR) / (1 + Inflation)] - 1. If your property delivers 9% CAGR and inflation is 6%, real return is (1.09 / 1.06) - 1 = 2.83%, not the common approximation of 3%. Over 15 years, this 0.17% error compounds into a meaningful planning mistake.
City-wise Rental Yields in India: 2025 Data
Rental yields vary widely across Indian cities. These are approximate gross yields based on 2024-25 market data:
| City | Gross Yield | 10Y Appreciation | Market Type |
|---|---|---|---|
| Mumbai | 2.5-3% | 7-9% CAGR | Premium metro |
| Delhi NCR | 2.8-3.5% | 6-8% CAGR | Premium metro |
| Bengaluru | 3-4% | 8-10% CAGR | Tech hub |
| Hyderabad | 3.5-4.5% | 9-12% CAGR | High growth |
| Pune | 3.5-4.5% | 8-10% CAGR | Mid-size IT |
| Chennai | 3-4% | 7-9% CAGR | Stable metro |
| Ahmedabad | 4-5% | 8-11% CAGR | Emerging |
| Tier-2 cities | 4-6% | 8-12% CAGR | High growth |
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Property vs Mutual Funds: Which Delivers Better Real Returns?
Over 2010-2024, diversified equity mutual funds delivered 12-15% CAGR. Residential property in metro cities delivered 8-11% CAGR (rent + appreciation combined). However, property benefits from leverage: with 20% down, return on equity can exceed 25% in rising markets.
Key differences: property has 5-8% transaction costs (stamp duty + registration), is illiquid, and requires active management. Mutual funds have minimal transaction costs and are liquid. Real (inflation-adjusted) returns have historically averaged 4-7% for both asset classes over 15-year periods in India.
Tax on Rental Income and Property Sale: What to Know
Rental income is taxable under "Income from House Property" in India. A 30% standard deduction is allowed on net annual value, plus full home loan interest deduction. TDS at 2% under Section 194-IB applies when monthly rent exceeds Rs 50,000, a rate cut from 5% effective 1 October 2024.
Capital gains on property held over 24 months are Long-Term (LTCG) taxed at 12.5% without indexation (post Budget 2024). Short-term gains (under 24 months) are taxed at slab rates. Section 54 exempts LTCG if you reinvest in another residential property within 2 years of sale. Use the Income Tax Calculator to estimate your total liability including rental income.
Common Mistakes When Calculating Property ROI
Retirement Corpus Calculator
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Home Loan Interest Deduction Is Uncapped for Rented Property
Yes, unlike a self-occupied home. Under Section 24(b), a self-occupied property caps home loan interest deduction at Rs 2 lakh a year, but a let-out property has no ceiling at all, the full interest paid against rental income can be claimed.
This makes a leveraged rental property meaningfully more tax-efficient than the raw cash-on-cash numbers suggest, since a large interest outgo that looks like a drag on cash flow is fully deductible against the rental income it generates.
Is the Project You Are Buying Into RERA-Registered
Check before you buy. Under the Real Estate (Regulation and Development) Act, 2016, any project larger than 500 square metres or with more than 8 apartments must be registered with the state RERA authority.
Registration means the promoter has disclosed project timelines, land title, and approvals, and must deposit 70% of buyer funds in an escrow account earmarked for construction. An unregistered project of this size is a red flag, not a formality being skipped.
Why Selling Below Circle Rate Can Still Trigger Higher Tax
Under Section 50C of the Income Tax Act, if you sell a property below its stamp duty value (circle rate), capital gains are computed on the higher circle rate, not your actual sale price, unless the difference is within a 10% tolerance band.
The same gap can also be taxed as "income from other sources" in the buyer's hands under Section 56(2)(x). Always check the applicable circle rate before agreeing on a sale price, since it directly affects both parties' tax bills.
Does GST Apply When You Buy the Property
Only if it is under construction. Under-construction residential property attracts 5% GST without input tax credit, or 1% for affordable housing (carpet area up to 60 sq m in metros, priced at Rs 45 lakh or below), per CBIC rules.
A ready-to-move property, where the full consideration is paid after the completion certificate, and any resale property sold by an individual owner, attract no GST at all. This is a meaningful cost difference to factor in when comparing a new launch against a resale flat.
NRI Landlords Face a Much Higher TDS Rate on Rent
If your landlord is an NRI, the tenant must deduct TDS at 30% (31.2% with cess) under Section 195, from the very first rupee of rent, unlike the Rs 50,000/month threshold that applies to resident landlords under Section 194-IB.
This affects the net rental income NRI property investors actually receive. A lower TDS rate is possible only with a valid Section 197 certificate or applicable DTAA relief, which the NRI landlord must arrange in advance.
How to Use This Calculator
- Enter the property purchase price: include stamp duty and registration for accuracy.
- Enter the monthly rent: use current rent received or expected rent for a planned purchase.
- Set the holding period: the number of years before you plan to sell.
- Click "More Settings": to adjust annual appreciation %, annual costs %, and inflation rate.
- Read the results: gross yield, net yield, exit value, total ROI, CAGR, and real return update instantly. The donut shows how much of total profit comes from capital gain vs rental income.
Plan property tax and investment strategy with a CA
A CA can model LTCG exemptions under Section 54, rental income tax, and help you decide between old and new regime.
Frequently Asked Questions
Disclaimer: All calculations on this page are indicative only and assume constant rent, appreciation, and inflation rates over the holding period. Actual real estate returns vary by property type, location, and market cycle. Capital gains tax treatment depends on your total income and applicable Budget year rules. This calculator is for educational and planning purposes only and does not constitute financial or investment advice. Consult a registered investment adviser or RERA-registered agent before making property investment decisions. CAs can generate detailed Tax Optimization Reports covering rental income and LTCG for clients at ca.fermor.in.