Lease Rental Discounting: How Banks Lend Against Rent, Including to Buy a Leased Asset
Lease rental discounting (LRD) is a loan sized on the rent a tenant has contracted to pay you, not on your salary. Banks lend the lower of 70% to 85% of the present value of the remaining rent and about 50% of the property's value, at roughly 8.3% to 11% in 2026, for no longer than the lease has left.
Key takeaways
- LRD raises money against a leased unit you own, or part-funds buying one already let.
- On a typical 7% yield asset, the rent test binds first. Expect a loan of roughly 35% to 40% of the price, not the 50% to 60% often quoted.
- The tenant pays rent into an escrow account the bank controls. The EMI comes out first and you get the balance.
- Banks want a registered lease with three years or more left, and price the loan off the tenant's strength.
- Interest is deductible against the rent only when the loan bought, built or repaired that property.
Two jobs, one loan
The classic use is equity release: you own a leased office, the bank discounts the rent it will receive over the coming years, and you spend the money elsewhere. The second use matters more to buyers on our pre-leased property pages: banks and housing finance companies also fund the purchase of an already-let asset under LRD. The bank needs the tenant to attorn to you as the new landlord before rent can be routed to its escrow, so plan the sale deed, the attornment and the disbursement as one sequence.
A vacant unit, or one you want for your own business, doesn't qualify. That needs a commercial property purchase loan, underwritten on your income.
How the bank sizes the loan: a worked example
Lenders run three tests and lend the lowest answer.
- Rent value: a share of the present value of rent over the remaining lease: 85% in our pre-leased hub, 70% of rent receivable in SBI's scheme as summarised by IndiaFilings.
- Property value: about 50% of market value at ICICI Bank and HDFC Bank, higher at some lenders.
- Cash cover: ICICI Bank caps the EMI at 90% of net monthly rent; other lenders quote 60% to 70%.
Take a ready office bought for Rs 2 crore, let at Rs 1,20,000 a month (7.2% gross) with nine years left on the lease. After 10% TDS, Rs 1,08,000 a month reaches the escrow, and banks size on that. The loan is at 9.5% over 108 months, ignoring escalation.
| Test | Working | Loan it allows |
|---|---|---|
| 85% of present value of rent | Rs 1,08,000 x 72.41 (108-month factor at 9.5%) = Rs 78.2 lakh, x 85% | About Rs 66.5 lakh |
| EMI within 90% of net rent | Rs 97,200 EMI over 108 months at 9.5% | About Rs 70.4 lakh |
| 80 times net monthly rent (ICICI's multiple) | Rs 1,08,000 x 80 | Rs 86.4 lakh |
| 50% of market value | Rs 2 crore x 50% | Rs 1 crore |
| 60% of market value | Rs 2 crore x 60% | Rs 1.2 crore |
The binding figure is Rs 66 lakh to Rs 70 lakh, or 33% to 35% of the price. Counting a 15% escalation every three years lifts the present-value test to about Rs 75 lakh, still under 40%. Our hub's rule (85% of NPV or 50% to 60% of value, whichever is lower) stands, with one correction of emphasis: on a 7% yield asset the value cap rarely bites. By our arithmetic it binds only near a 10% net yield on a nine-year lease.
So the purchase needs about Rs 1.3 crore of your own money plus stamp duty. A Rs 70 lakh loan's EMI is about Rs 96,666, leaving roughly Rs 11,300 a month, or Rs 23,300 once the TDS returns as a tax credit.
Lender by lender: caps, tenure and fees
Published LRD terms are thin, and rate quotes disagree: two comparison sites put HDFC Bank's rent-receivables loan at 8.25% to 8.5% and 9.71% to 10.32%.
| Lender | Loan size rule | Tenure | Rate and fees as published |
|---|---|---|---|
| ICICI Bank | 80 times net monthly rent or 50% of value, lower; max Rs 3 crore (Rs 5 crore specialised) | Up to 15 years; 10 for warehouses, hotels, schools | Escrow mandatory; 3-year minimum lease |
| HDFC Bank | Up to 50% of property value; Rs 10 lakh to Rs 5 crore | 12 to 108 months | Quoted between 8.25% and 10.32% (sources differ) |
| SBI (as summarised) | 70% of rent receivable over the unexpired lease, up to Rs 50 crore | Unexpired lease, max 10 years | MCLR-linked |
| Axis Bank | From Rs 5 lakh | Tied to lease | 1% processing fee including a Rs 5,000 login fee |
| Kotak Mahindra Bank | Discounted rent, escrow-backed | Up to 15 years | Priced on tenant and lease |
| Bajaj, Aditya Birla, PNB Housing | Rent-based | Varies | From 8%, 8.35% and 9.25% |
"From" rates go to strong tenants and large loans; one LRD adviser's material puts the rate at about 8.3% for a AAA-rated tenant against 10.5% for an A-rated one. With the repo rate at 5.25% after the August 2026 review, 9% to 11% is realistic for an individual with one leased unit, so the hub's 12% ceiling is now high. Processing fees run up to 2%.
Individual or company borrower
RBI's prepayment directions bar commercial banks from charging prepayment penalties on floating-rate loans, business loans included, to individuals and micro and small enterprises, for loans sanctioned or renewed from 1 January 2026. A company outside the MSE category has no such protection: Axis Bank charges non-individual borrowers 3% for prepaying over 25% of principal in a quarter, and 3% on a takeover. Companies can borrow more but sign tighter covenants, often with a debt-service reserve of four to six months' EMI on multi-tenant deals.
Balance transfer and top-up
An LRD loan can move to a cheaper lender, often with a top-up if rent has escalated. As with a home loan balance transfer, add up processing, legal, valuation and mortgage stamp costs first. A new sanction re-tests the unexpired lease, so a top-up late in a lease will be small.
Escrow, the tripartite agreement and what the bank checks
The tenant undertakes, in a tripartite agreement with you and the bank, to pay rent only into an escrow account. The bank takes the EMI first and releases the surplus. You can't change the account, cut the rent or amend the lease without the bank's written consent. Lenders test three things:
- The tenant: banks, PSUs, listed companies and MNCs get the best terms; a start-up may not qualify.
- The lease: registered, with at least three years unexpired; the loan cannot outlast it. Our office lease terms guide covers the clauses the bank's lawyer reads.
- The property: clear title, approved plans and an occupation certificate. Strata-sold malls often struggle, as our note on high-street versus mall shops explains.
Interest, rent and income tax
Rent is income from house property under sections 20 to 24 of the Income-tax Act, 2025. Section 22 (the old section 24) gives a 30% deduction and, on a let-out property, uncapped interest on money borrowed to acquire, build or repair it. In our example, Rs 14.4 lakh of rent less 30% is Rs 10.08 lakh; less about Rs 6.43 lakh of year-one interest, Rs 3.65 lakh is taxable.
Equity release is different. Borrow against an office you own and spend the money elsewhere, and the interest does not reduce that rent. It may be deductible where the money goes, such as a business expense, or against another let-out property it buys. Keep the trail from disbursement to use.
A house property loss offsets other income only up to Rs 2 lakh a year under section 109 (the old 71(3A)); the rest carries forward eight years under section 110, and not at all on the new regime. Our guide to tax on rental income covers the rest. Rent above Rs 50,000 a month attracts 10% TDS under section 393(1) (the old 194-I).
Where LRD goes wrong
- The tenant leaves at the lock-in. The EMI continues from your pocket until a new lease is signed and accepted.
- A rent cut at renewal can shrink the loan the bank will carry.
- Buying on the headline loan. Sellers quote 50% to 60% funding; a 7% asset usually gets less.
- Thin surplus. At 90% EMI cover, one unpaid month means topping up the account.
Weighing a leased office against a flat? See our commercial versus residential comparison.
Frequently asked questions
Can I use lease rental discounting to buy a pre-leased property?
Yes. Several banks and housing finance companies fund the purchase of an already-leased shop or office under LRD. The tenant must attorn to you as the new landlord and agree to pay rent into the lender's escrow. On a typical 7% yield asset the loan usually works out to about 35% to 40% of the price, so plan for the rest in cash.
How much LRD loan will I get on Rs 1 lakh of monthly rent?
Roughly Rs 60 lakh to Rs 80 lakh on a nine-year lease at 9% to 10%, depending on the lender's method. ICICI Bank's cap of 80 times net monthly rent gives Rs 80 lakh, while 85% of the present value of the rent over nine years at 9.5% gives about Rs 61.5 lakh. A 50% of value cap and your credit score can pull it lower.
What happens to my LRD loan if the tenant vacates?
The loan does not end with the lease. You keep paying the EMI from your own funds, and sanction terms often let the bank seek part repayment or recall the loan if no replacement tenant is found within a set time. That is why lenders want a long unexpired lease and a lock-in covering much of the tenure.
Is interest on an LRD loan tax deductible?
Only against the rent when the money was borrowed to buy, build, repair or reconstruct that property, under section 22 of the Income-tax Act, 2025. If you raise LRD on an owned office and use the money elsewhere, the interest is judged by where it went, for example as a business expense. House property losses can offset other income only up to Rs 2 lakh a year.
Do banks charge a penalty for closing an LRD loan early?
Not for individuals and micro and small enterprises on floating-rate loans from commercial banks sanctioned or renewed since 1 January 2026, under RBI's prepayment directions. Companies outside the MSE category can still be charged: Axis Bank, for example, applies 3% to non-individual borrowers who prepay more than 25% of principal in a quarter or move the loan elsewhere.
Sizing an LRD loan or buying a leased unit? The Realty Hunting team can check the lease and numbers with you, and our commercial listings show current options.
