Q: Should I revise my paper and submit it to the same journal?
My paper is rejected and editor encouraged me to revise and resubmit. He stated in his mail that the journal has a 3% rejection rate. Should I re-submit to the same journal or submit to another journal?
From your question, it seems that the editor is very positive about your paper. If the editor has encouraged you to revise and resubmit, he/she must have seen some value in your paper. Since the editor has also mentioned that the journal has a low rejection rate, I feel he/she really wants you to resubmit. If it is a good journal, it is definitely worth a try.
Another benefit of submitting to the same journal is that it will definitely reduce the edtorial decision-making time. If the paper has already been peer reviewed, it will probably go to the same set of reviewers once again, and since they are familiar with your paper, the review process will be quicker.
Submitting to a different journal will take much longer, and moreover, you cannot be sure that your paper will be accepted. If the editor of this journal has shown interest, it makes more sense to revise and resubmit your paper to the same journal.