The 28/36 rule serves as a yardstick in order to calculate the amount of debt that an individual or a household can afford.
28/36 Ratio = a maximum of 28% of its gross monthly income on total housing expenses + not more than 36% on total debt service, including housing and other debt such as car loans (taken from google)
28/36 rule in practice -
To calculate 28 ratio,
Let’s assume your annual salary is Rs. 12,00,000. We divide the amount by 12 to get monthly gross income Rs. 100,000 which has to be multiplied by 0.28 which gets us 28,000 meaning you cannot spend more than 28000 each month on housing cost.
To calculate 36 ratio,
Multiply monthly gross income in this case 100,000 by 36 and it will give you the total debt-to-income ratio.
This becomes relevant for planning, organising and distributing income accordingly and understanding the limit of household spending.