Increase EMI if returns from investment lower than Home Loan Rate.. Taxation Also Needs to be Considered..

by Mr. Surya Bhatia, Managing Partner, Asset Managers

I am currently paying an equated monthly instalment (EMI) of Rs.52,000 for my housing loan of nearly Rs.46.5 lakh at an interest rate of 10.5 % for about 16 years. Should I increase my EMI by Rs.10,000 to reduce my loan tenor or  / should I put Rs.10, 000 in a recurring deposit (RD) at nearly  9 - 10 % interest rate per annum for 12 months and prepay Rs.1.04 lakh at one shot.

- Mr. Prerna

For a loan of Rs.46.50 lakh at an interest rate of 10.5 % over a term of 16 years, the EMI should be Rs.50,092. So, first of all, you need to cross-check the tenor of the housing loan and the rate of interest. Perhaps your interest rate has increased.

 

Mr. Surya Bhatia,
Managing Partner,
Asset Managers

If you increase your EMI by Rs.10,000, the same will become Rs.62,000, which will bring down your tenor from 16 to 10 years. Alternatively, if you do an RD at 9 % for 12 months, your principal accumulation will be Rs.1.20 lakh &  with interest accruals, the total amount would become Rs.1,26,646.

If you go by simple logic, then in case of RD, the deposit needs to be made every year and at the end of each year, a part of the loan is prepaid and this process is repeated every year.

This is done as you have increased the EMI for the entire term of the loan. This is not only a cumbersome process but you also stand to lose financially as the interest earned on RDs will always be lower than the interest you will pay on the loan.

Currently, you are paying a 10.5 % on the home loan and you are earning about 9 % on the deposits.

And this is when the taxation has not been factored in. Home loans offer you certain benefit on interest payment. The extent of benefit depends on the status of the house - whether the house is in possession or under construction &  if in possession then whether it is self-occupied or /  leased out.

On the other hand, the interest in bank deposits, including RDs, is taxable at your marginal rate of tax and the net earnings come down accordingly.

Prima facie you would be paying tax at the highest tax bracket rate of 30 %. This means that the effective post-tax yield from your RD will further come down to 6.22 %.

Hence, between the two options, it may be prudent for you to increase your EMI and reduce the term of the loan.

Also, optimize the tax benefits—for a self-occupied property, deduction under section 24 of the Income-tax Act is provided, while interest payment on housing loan up to Rs.1.50 lakh is allowed as deduction.

Src: Mint 

About Mr. Surya Bhatia..

Asset Managers is a niche boutique Financial Advisory firm with an extremely strong focus on Client satisfaction. Mr. Surya Bhatia, promoter of Asset managers has over 15 years of proven track record in Financial Services and Investment Advisory domain.

The organization excels through our one-to-one relationships with our clients and our client-centric service approach. We add value to the investing process through expert research, personalized service and comprehensive wealth management solutions. The products are developed purposefully to give investors choice and flexibility in creating quality investment portfolios that match each client’s financial goals and risk tolerance.

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