Showing posts with label Home Loan Tax Benefit. Show all posts
Showing posts with label Home Loan Tax Benefit. Show all posts
Monday, 10 September 2012
Axis Bank Happy Ending Home Loan Review: Look before you Leap
The much talked about Axis Bank-Happy Ending Home Loan Scheme (official site) is now open for home loan borrowers. But is that scheme really good and should home loan borrowers consider Axis Bank- Happy Ending Home Loan Scheme? Let's try to answer the question in this article and do a Review, Analysis and cover opinions and details about Axis Bank-Happy Ending Home Loan Scheme.
Friday, 7 October 2011
Real Estate Market Effect on Country's Economy
Detais about How real estate market can cause a blow to the Indian Economy
We've seen subprime in US, we've seen similar problems in European Countries, and the very latest at home, State Bank of India was downgraded by one of the rating agencies in a reported stress test because of its NPA's (Non Performing Assets) which are suspected to increase from the present 3.4% to a high of 12%, in case of a stress test situation as reported by CNBC news channel.
Still, we all sit with a belief that nothing will go wrong in India. India offers cheap labour options from unskilled streams to highly skilled IT streams so outsourcing will never stop to India. So it is OK to take loans for house, cars, etc. and live peacefully under the assumption that job will stay, economy is tightly controlled by government so nothing will go wrong.
However, one simple issue takes no time to become a nation-wide problem. Let's see how the real estate market of India (sometimes called over-regulated, sometimes uner-regulated) can cause problems to the economy.
First, is the real estate sector over-regulated as quoted by many builders? The answer is yes, but this yes is limited to only getting various permissions from multiple authorities to get into and continue the real estate business.
Is it under-regulated? Again, Yes (in fact a big YES), because there is absolutely no control on prices quoted or randomly raised by the builders. Take this example, a friend of mine in Pune has been looking around for a 2 BHK apartment since last 7-8 months. In an area like Balewadi which is like the western outskirts of Pune with no proper infrastructure, the prices have risen from a low of 3700 to 4500 in a matter of 7 months.
Who controls these prices and what regulation we have there? Absolutely nothing.
So, the rates keep going north, for few months, few years. Everyone believes its all looking good and assumes that it will all remain good, so people take loans. Not just the private banks, even government banks are willingly offering loans freely. No one ever dares or takes any effort in questioning the rationale behind the high property prices. Builders want high price, Banks want high interest high amount loans, and who is left at the other end - its you and me, the common man - highly talented, service class, worked hard for studies, now toiling hard in the MNC job, and will continue doing the same to repay the EMI's for the rest of his life for his dream house or dream car.
And this is where the problem lies - Since no one questions why there has been a steep price rise, say from 3700 to 4500 in a matter of 6-8 months, and banks keep awarding loans, it might turn out to be a problematic situation for the bank.
Assume this - X started looking for a home 8 months back when the rates quoted were 3700. He thought its high, so he waited and explored more. However, instead of rates coming down, they sky rocketed, for no reason, to 4500. After toiling hard in search of home, X finally gives in and books an under-construction flat at high cost of 4500, whose possession is promised to be in 2 years time. So his Home Loan EMI's start. Since the flat is not ready, he is paying rent also. It's hitting him double hard, and this will continue for atleast 2 years till he gets possession of his own flat when he can start saving the rent.
Now comes the problem - The builder has constructed all the 12 floors of the building in 1 years time. X is happy seeing this progress - he is even assuming that since all 12 floors are ready in just 1 year, he might get possession early. However, even then there is a lot of work left in the building. Water connection, Electrical wiring, Electrical supply, Gas supply, plaster work, windows, etc. etc. etc.. The bad part - the builder might even stop the work because of his own reasons or delay it further.
And then comes the worst part - there is a downturn in global economy. X looses his MNC job or his salary is reduced. However, his EMI's are continuing and so is his rent because his flat is not yet ready. After remaining jobless for 6 months, X cannot afford anymore payments anymore and decides to give up. He moves back to his native town/village foregoing whatever he paid as pre-EMI's and downpayments. Now, the bank is left with a property which is under-construction. Since X is no longer in scene, it now taken over by the bank (an under-construction property). It is now the bank which is going to take the hit because it is the one which has given the loan money. X is out with his foreclosure, Bank is now liable. All that the bank is left with is a not-ready property on paper which it has the right to sell.
But where can it find buyers? When there is global economic problems, there are lots of layoffs, high interest rates, then there are no buyers. And note that it is an under construction property. Who would buy an under-construction property from a bank in such a time? Ultimately, the banks take the hit.
Another scenario - X does not loose his job but interest rates keep rising. X took home loan at interest rate of 8% and now it is at 12%. It has caused a big rise in EMI for X. X may not be able to afford it and the bank is not willing to increase his lona tenure considering his age. So ultimately, X may default. It's again the bank which is left with such a property which may not have much value.
To see more on Home Loan related Tax Benefits, please check Home Loan Tax Benefits and All Home Loan Articles
It is these kind of global/local scenarios which lead to a complete and big set of problems for the banks. As long as there is no one to question the random real estate price hikes, as long as the banks (both private and government) freely lend out loans to individuals without considering the actual price worth of the mortgaged property, these problems will continue. The home loan provider banks simply pass on the liability to the individuals. All that is based upon the understanding and assumption that individual will be able to keep on bearing the cost of high interest rates, longer loan durations and higher EMI payments.
Unless there is some proper regulation in place to check the menace of abrupt and high cost prices quoted by builder lobby, the risk of real estate on national economy will always remain
We've seen subprime in US, we've seen similar problems in European Countries, and the very latest at home, State Bank of India was downgraded by one of the rating agencies in a reported stress test because of its NPA's (Non Performing Assets) which are suspected to increase from the present 3.4% to a high of 12%, in case of a stress test situation as reported by CNBC news channel.
Still, we all sit with a belief that nothing will go wrong in India. India offers cheap labour options from unskilled streams to highly skilled IT streams so outsourcing will never stop to India. So it is OK to take loans for house, cars, etc. and live peacefully under the assumption that job will stay, economy is tightly controlled by government so nothing will go wrong.
However, one simple issue takes no time to become a nation-wide problem. Let's see how the real estate market of India (sometimes called over-regulated, sometimes uner-regulated) can cause problems to the economy.
First, is the real estate sector over-regulated as quoted by many builders? The answer is yes, but this yes is limited to only getting various permissions from multiple authorities to get into and continue the real estate business.
Is it under-regulated? Again, Yes (in fact a big YES), because there is absolutely no control on prices quoted or randomly raised by the builders. Take this example, a friend of mine in Pune has been looking around for a 2 BHK apartment since last 7-8 months. In an area like Balewadi which is like the western outskirts of Pune with no proper infrastructure, the prices have risen from a low of 3700 to 4500 in a matter of 7 months.
Who controls these prices and what regulation we have there? Absolutely nothing.
So, the rates keep going north, for few months, few years. Everyone believes its all looking good and assumes that it will all remain good, so people take loans. Not just the private banks, even government banks are willingly offering loans freely. No one ever dares or takes any effort in questioning the rationale behind the high property prices. Builders want high price, Banks want high interest high amount loans, and who is left at the other end - its you and me, the common man - highly talented, service class, worked hard for studies, now toiling hard in the MNC job, and will continue doing the same to repay the EMI's for the rest of his life for his dream house or dream car.
And this is where the problem lies - Since no one questions why there has been a steep price rise, say from 3700 to 4500 in a matter of 6-8 months, and banks keep awarding loans, it might turn out to be a problematic situation for the bank.
Assume this - X started looking for a home 8 months back when the rates quoted were 3700. He thought its high, so he waited and explored more. However, instead of rates coming down, they sky rocketed, for no reason, to 4500. After toiling hard in search of home, X finally gives in and books an under-construction flat at high cost of 4500, whose possession is promised to be in 2 years time. So his Home Loan EMI's start. Since the flat is not ready, he is paying rent also. It's hitting him double hard, and this will continue for atleast 2 years till he gets possession of his own flat when he can start saving the rent.
Now comes the problem - The builder has constructed all the 12 floors of the building in 1 years time. X is happy seeing this progress - he is even assuming that since all 12 floors are ready in just 1 year, he might get possession early. However, even then there is a lot of work left in the building. Water connection, Electrical wiring, Electrical supply, Gas supply, plaster work, windows, etc. etc. etc.. The bad part - the builder might even stop the work because of his own reasons or delay it further.
And then comes the worst part - there is a downturn in global economy. X looses his MNC job or his salary is reduced. However, his EMI's are continuing and so is his rent because his flat is not yet ready. After remaining jobless for 6 months, X cannot afford anymore payments anymore and decides to give up. He moves back to his native town/village foregoing whatever he paid as pre-EMI's and downpayments. Now, the bank is left with a property which is under-construction. Since X is no longer in scene, it now taken over by the bank (an under-construction property). It is now the bank which is going to take the hit because it is the one which has given the loan money. X is out with his foreclosure, Bank is now liable. All that the bank is left with is a not-ready property on paper which it has the right to sell.
But where can it find buyers? When there is global economic problems, there are lots of layoffs, high interest rates, then there are no buyers. And note that it is an under construction property. Who would buy an under-construction property from a bank in such a time? Ultimately, the banks take the hit.
Another scenario - X does not loose his job but interest rates keep rising. X took home loan at interest rate of 8% and now it is at 12%. It has caused a big rise in EMI for X. X may not be able to afford it and the bank is not willing to increase his lona tenure considering his age. So ultimately, X may default. It's again the bank which is left with such a property which may not have much value.
To see more on Home Loan related Tax Benefits, please check Home Loan Tax Benefits and All Home Loan Articles
It is these kind of global/local scenarios which lead to a complete and big set of problems for the banks. As long as there is no one to question the random real estate price hikes, as long as the banks (both private and government) freely lend out loans to individuals without considering the actual price worth of the mortgaged property, these problems will continue. The home loan provider banks simply pass on the liability to the individuals. All that is based upon the understanding and assumption that individual will be able to keep on bearing the cost of high interest rates, longer loan durations and higher EMI payments.
Unless there is some proper regulation in place to check the menace of abrupt and high cost prices quoted by builder lobby, the risk of real estate on national economy will always remain
Tuesday, 13 September 2011
Tax Benefits on Home Improvement Loans: Home Renovation Loan Tax Benefits
Continuing our series of articles on Home Loan Tax Benefits, here are some important details about another important aspect of home loans - the Home Loans taken for Home Renovation or Home Improvements. This is a common scenario in case you buy some old resale property (see related Advantages Of Buying Resale Property, Disadvantages Of Buying Resale Property & Checklist for Resale Property Purchase), OR you inherit some property from your parents or family OR you get some old property as a gift from any of your relatives or friends. Being an old property, it needs some furbishing, some repair work, etc. but that cost is high for you to afford. So you decide to take a Home Improvement Loan or Home Loan for Renovation . The question is - is the home loan taken for Improvement or renovation eligible for any tax benefits? Who all can avail the home improvement loan tax benefit? Let's see some of these cases in this article
The home loan which is taken for carrying on repair, renewal, reconstruction or renovation in any old house or residential property is called home improvement loan.
Who is eligbile for home improvement loan or Home renovation loan?
Any individual who is the owner or joint owner of the property can apply for home improvement loan or Home renovation loan. The bank providing the loan will decide the eligibility criteria for the individual.
Is Tax benefit available for the borrowers on home improvement loan or Home renovation loan?
Yes, you can get tax deduction benefit in respect of the interest payable on the loan taken for repair, renewal, reconstruction or renovation to the extent of Rs 1.50 lakh under section 24 of the Income-tax Act, provided the house is self-occupied. There is no limit on the tax benefit on interest if the house is on rent.
However, there are 2 limitations -
1) Only the interest portion of the Home Improvement Loan qualifies for tax benefit. The principle portion repayment amount does not provide any tax saving benefit.
2) Tax benefit can be availed only by the owners or co-owners (joint home owners)
Please note that this tax benefit is available on ALL investments and expenses you make under section 80C, and although the SUM TOTAL of all these can exceed 1.5 lakhs, the tax benefit can ONLY be availed on 1.5 lakhs maximum. See Tax Savings Section 80C: List of Qualifying Investments and Expenses
To see more on Home Loan related Tax Benefits, please check Home Loan Tax Benefits and All Home Loan Articles
Is Tax benefit available to co-applicants also for home improvement loan or Home renovation loan?
There is this new term called "co-applicants" which has been devised by many banks. This term basically refers to a person whose name banks take as co-applicants along with the actual home loan borrowers. Usually, Home loan provider banks take a name of co-applicant for 2 reasons
1) Security : In case the primary loan seeker defaults, the co-applicant can be approached
2) Nominee: In case of death of the primary loan seeker, the co-applicant is approached
However, Home loan co-applicants are usually NOT eligible for tax benefits on any kind of home loans. Only the owners & joint owners whose names appear on the property documents are eligible for home loan tax benefits. However, the definition of co-applicants may differ from one bank to the other. Please check with your home loan bank's legal department on the tax benefit eligibility for any kind of home loan. They should be courteous enough to provide that advice free of cost
Home Improvement Loan Tax Benefit: Home Renovation Loan Details
What is home improvement loan or Home renovation loan?The home loan which is taken for carrying on repair, renewal, reconstruction or renovation in any old house or residential property is called home improvement loan.
Who is eligbile for home improvement loan or Home renovation loan?
Any individual who is the owner or joint owner of the property can apply for home improvement loan or Home renovation loan. The bank providing the loan will decide the eligibility criteria for the individual.
Is Tax benefit available for the borrowers on home improvement loan or Home renovation loan?
Yes, you can get tax deduction benefit in respect of the interest payable on the loan taken for repair, renewal, reconstruction or renovation to the extent of Rs 1.50 lakh under section 24 of the Income-tax Act, provided the house is self-occupied. There is no limit on the tax benefit on interest if the house is on rent.
However, there are 2 limitations -
1) Only the interest portion of the Home Improvement Loan qualifies for tax benefit. The principle portion repayment amount does not provide any tax saving benefit.
2) Tax benefit can be availed only by the owners or co-owners (joint home owners)
Please note that this tax benefit is available on ALL investments and expenses you make under section 80C, and although the SUM TOTAL of all these can exceed 1.5 lakhs, the tax benefit can ONLY be availed on 1.5 lakhs maximum. See Tax Savings Section 80C: List of Qualifying Investments and Expenses
To see more on Home Loan related Tax Benefits, please check Home Loan Tax Benefits and All Home Loan Articles
Is Tax benefit available to co-applicants also for home improvement loan or Home renovation loan?
There is this new term called "co-applicants" which has been devised by many banks. This term basically refers to a person whose name banks take as co-applicants along with the actual home loan borrowers. Usually, Home loan provider banks take a name of co-applicant for 2 reasons
1) Security : In case the primary loan seeker defaults, the co-applicant can be approached
2) Nominee: In case of death of the primary loan seeker, the co-applicant is approached
However, Home loan co-applicants are usually NOT eligible for tax benefits on any kind of home loans. Only the owners & joint owners whose names appear on the property documents are eligible for home loan tax benefits. However, the definition of co-applicants may differ from one bank to the other. Please check with your home loan bank's legal department on the tax benefit eligibility for any kind of home loan. They should be courteous enough to provide that advice free of cost
Wednesday, 24 August 2011
PrePayment Charges Calculation on Home Loan: How it affects you?
Continuing further from our first part on this series of articles on PrePayment Charges Calculation on Home Loan, here is the second part. Please read Part I Home Loan PrePayment Charges: With or Without PrePayment Charges Calculation Example, before continuing with this one.
Is it beneficial for the borrower to prepay his home loan as early as possible?
In short, the answer is YES.
Remember, the longer your loan tenure, the more money you repay to the bank for the same loan amount.
Also, something which cannot be quantified is the mental tension that one has to bear for the longer loan duration. Secondly, the loan borrower also carries the risk of increase in home loan interest rates over the longer period of time. So the shorter the loan period, the less you pay back to the bank, the less risk you take and the less tension period you have.
Have a look at these nos. Imagine you took home loan at 10% for an amount of 25 Lakh Rs. If you repay the loan in the mentioned time-periods, the lower money you pay back to the bank:
Loan Period - Total Amount Repaid
-----------------------------------
1 year - 26,37,477
5 years - 31,87,057
10 years - 39,64,522
15 years - 48,35,723
So the earlier you payback the better because the lower amount you have to repay. Please note that the above does not contain pre-payment charges
Related: Home Loan Tax Benefits and All Home Loan Articles
How does change in interst rate affect the prepayment of home loan?
This is the whole crux of the story - and is the central theme of this set of articles about which home loan you should take - one with prepayment charges or one without any prepayment charges.
Assume that you have taken a home loan from a bank for 25 Lakh Rs. for a period of 15 years at the interest rate of 10% per annum. So things go smoothly for a period of 1 year i.e. the home loan interest rate remains at 10% for a year and after that interest rates start to increase. In another 1 year, they shoot upto 12% per annum. With every change in interest rate, your bank will either increase the EMI amount or increase the loan tenure, or a mix of both. The first and the third scenarios are rare - almost all the banks by default increase your loan tenure.
As explained in previous section, increasing the loan tenure has adverse effect for the borrower both in terms of amount of loan to be repaid to the bank and the longer duration for EMI payments.
Now add to it the strict conditions applied by some banks and NBFC which do NOT allow prepayment of home loans, or charges heavily on prepayment charges. What happens in this case? Your loan tenure has increased - means you need to pay same (or more EMI) for a longer period of time. You can avoid that if you prepay some portion of your loan, but that may not be allowed by your home loan bank or NBFC or it may take prepayment charges for the same. So either way, you have to take the hit - either pay prepayment charges or pay more to the bank in long durations of repayment or higher EMI's.
Now what is the benefit if you take home loan from a bank which does not have any pre-payment charges?
Consider the same scenario discussed above - the interest rates increased causing a longer duration for your EMI payment or increased EMI's. Suppose that you have received some bonus amount from your employer, or you take money from your parents/relatives or sell any property and use that money to prepay your hoam loan. You can do so easily without any problems and without any pre payment charges - such early payments or prepayments of homeloans will ensure that your loan duration remains less and also the total amount of money to be repaid to the bank remains low.
So, definetely a bank offering home loan without prepayment charges is better than the one which is offering home loan with prepayment charges or limits on prepayment.
But do check in case the home loan offering bank or NBFC is having any hidden conditions attached.
Is it beneficial for the borrower to prepay his home loan as early as possible?
In short, the answer is YES.
Remember, the longer your loan tenure, the more money you repay to the bank for the same loan amount.
Also, something which cannot be quantified is the mental tension that one has to bear for the longer loan duration. Secondly, the loan borrower also carries the risk of increase in home loan interest rates over the longer period of time. So the shorter the loan period, the less you pay back to the bank, the less risk you take and the less tension period you have.
Have a look at these nos. Imagine you took home loan at 10% for an amount of 25 Lakh Rs. If you repay the loan in the mentioned time-periods, the lower money you pay back to the bank:
Loan Period - Total Amount Repaid
-----------------------------------
1 year - 26,37,477
5 years - 31,87,057
10 years - 39,64,522
15 years - 48,35,723
So the earlier you payback the better because the lower amount you have to repay. Please note that the above does not contain pre-payment charges
Related: Home Loan Tax Benefits and All Home Loan Articles
How does change in interst rate affect the prepayment of home loan?
This is the whole crux of the story - and is the central theme of this set of articles about which home loan you should take - one with prepayment charges or one without any prepayment charges.
Assume that you have taken a home loan from a bank for 25 Lakh Rs. for a period of 15 years at the interest rate of 10% per annum. So things go smoothly for a period of 1 year i.e. the home loan interest rate remains at 10% for a year and after that interest rates start to increase. In another 1 year, they shoot upto 12% per annum. With every change in interest rate, your bank will either increase the EMI amount or increase the loan tenure, or a mix of both. The first and the third scenarios are rare - almost all the banks by default increase your loan tenure.
As explained in previous section, increasing the loan tenure has adverse effect for the borrower both in terms of amount of loan to be repaid to the bank and the longer duration for EMI payments.
Now add to it the strict conditions applied by some banks and NBFC which do NOT allow prepayment of home loans, or charges heavily on prepayment charges. What happens in this case? Your loan tenure has increased - means you need to pay same (or more EMI) for a longer period of time. You can avoid that if you prepay some portion of your loan, but that may not be allowed by your home loan bank or NBFC or it may take prepayment charges for the same. So either way, you have to take the hit - either pay prepayment charges or pay more to the bank in long durations of repayment or higher EMI's.
Now what is the benefit if you take home loan from a bank which does not have any pre-payment charges?
Consider the same scenario discussed above - the interest rates increased causing a longer duration for your EMI payment or increased EMI's. Suppose that you have received some bonus amount from your employer, or you take money from your parents/relatives or sell any property and use that money to prepay your hoam loan. You can do so easily without any problems and without any pre payment charges - such early payments or prepayments of homeloans will ensure that your loan duration remains less and also the total amount of money to be repaid to the bank remains low.
So, definetely a bank offering home loan without prepayment charges is better than the one which is offering home loan with prepayment charges or limits on prepayment.
But do check in case the home loan offering bank or NBFC is having any hidden conditions attached.
Home Loan PrePayment Charges: With or Without PrePayment Charges Calculation Example
Details & Comparison about Home Loans which are without pre-payment charges and with pre-payment charges - Calculations & Examples to show which one is beneficial to take
Axis Bank has recently launched a new ad for their home loans, and the pitch of the ad focuses around the "pre-payment charges". The theme is that a couple wins a lot of money in one of the TV shows and they plan to prepay their home loan using the prize money. The anchor asks them about prepayment charges, which are usually levied when someone pays up a loan before his loan schedule i.e. extra money reapid early over and above the usual EMI payment amount, so as to close the loan early. These pre-payment charges are for this kind of early payment of loan. Then the prize winner hits the punchline - "Paise chukane ke bhi paise lagenge" i.e. to pay back money, you need to pay money (charges). Then her hubby says that "Dont worry, our loan is with Axis Bank who do not have any pre-payment charges".
This ad clicks (atleast to me and my fellow colleagues) - the reason? It hits right into the current economic scenario where banks are raising the interest rates every now and then and people are either required to pay higher EMI's or their loan tenures are increasing or both. What that ultimately means? Your loan amount is same, but what you repay to the bank is increasing considerably.
Let's start from the basics:
What are home loan prepayment charges? Why do home loan banks or NBFC take such a prepayment charge?
Home Loan Prepayment charges are those charges which have to be paid in case one decided to repay his/her home loan earlier than the agreed loan achedule. However, please note that some banks & NBFC do NOT have prepayment charges on home loans, some banks have it if the amount being prepaid exceeds a limit (say 20% of the outstanding loan amount each year), while some banks or NBFC have it mandatorily.
NBFC - Non Banking Financial Companies (These are not banks so they dont come under Reserve Bank of India regulations directly. E.g. are Indiabulls, LIC Housing Finance Company, HDFC Limited). One thing which is important to mention here is that although HDFC is known to be one of the largest home loan providers in India, the home loan division is not under HDFC Bank, but it is HDFC limited, an NBFC.
Why do banks or NBFC charge prepayment charges amount?
Because when you take loan for a specified period of time (say 25 Lakhs for 15 years at 10%), your EMI will come to 26,865 Rs. Banks know for sure that you will contine to pay this EMI amount each month for the next 15 years.
So in this case, you pay back the bank a total of 48,35,700 Rs. in total, over your tenure of 15 years (assuming no changes to interst rates).
But when you decide to prepay your home loan amount i.e. add more amount to the paid EMI, then the calculations change. Your loan tenure comes down from 15 years.
Say after 1 year of you taking home loan, you got a bonus of 2 lakhs, or you sold your old property and use that money to prepay your existing home loan. So now, because of this prepayment of 2 lakh Rs. after 1 year of you taking the home loan, your total amount paid back to the bank has come down to 43,13,050 and your tenure has also come down from 15 years to 12 years and 10 months. So, because of this prepayment, you managed to save 5,22,675 Rs. and your home loan tension period shortened by 2 years and 2 months. So this is beneficial to you.
However, for the bank, it is a problem. The amount that they were relying upon as a steady stream for 15 years has come down to a lesser amount as well as for a lesser tenure. That is something which hurts their profits, as well as cashflows. Hence, they impose a charge for such prepayments.
Related: Home Loan Tax Benefits and All Home Loan Articles
Is it beneficial for the borrower to prepay his home loan as early as possible?
In short, the answer is YES.
Remember, the longer your loan tenure, the more money you repay to the bank for the same loan amount. Continue to Part II - PrePayment Charges Calculation on Home Loan: How it affects you?
Axis Bank has recently launched a new ad for their home loans, and the pitch of the ad focuses around the "pre-payment charges". The theme is that a couple wins a lot of money in one of the TV shows and they plan to prepay their home loan using the prize money. The anchor asks them about prepayment charges, which are usually levied when someone pays up a loan before his loan schedule i.e. extra money reapid early over and above the usual EMI payment amount, so as to close the loan early. These pre-payment charges are for this kind of early payment of loan. Then the prize winner hits the punchline - "Paise chukane ke bhi paise lagenge" i.e. to pay back money, you need to pay money (charges). Then her hubby says that "Dont worry, our loan is with Axis Bank who do not have any pre-payment charges".
This ad clicks (atleast to me and my fellow colleagues) - the reason? It hits right into the current economic scenario where banks are raising the interest rates every now and then and people are either required to pay higher EMI's or their loan tenures are increasing or both. What that ultimately means? Your loan amount is same, but what you repay to the bank is increasing considerably.
Home Loan PrePayment Charges Calculator
Disclosure: One of the authors has a home loan from Axis Bank which is without pre-payment charges. This article is based upon calculations done on those inputs and scenarios where interest rates have changed very frequentlyLet's start from the basics:
What are home loan prepayment charges? Why do home loan banks or NBFC take such a prepayment charge?
Home Loan Prepayment charges are those charges which have to be paid in case one decided to repay his/her home loan earlier than the agreed loan achedule. However, please note that some banks & NBFC do NOT have prepayment charges on home loans, some banks have it if the amount being prepaid exceeds a limit (say 20% of the outstanding loan amount each year), while some banks or NBFC have it mandatorily.
NBFC - Non Banking Financial Companies (These are not banks so they dont come under Reserve Bank of India regulations directly. E.g. are Indiabulls, LIC Housing Finance Company, HDFC Limited). One thing which is important to mention here is that although HDFC is known to be one of the largest home loan providers in India, the home loan division is not under HDFC Bank, but it is HDFC limited, an NBFC.
Why do banks or NBFC charge prepayment charges amount?
Because when you take loan for a specified period of time (say 25 Lakhs for 15 years at 10%), your EMI will come to 26,865 Rs. Banks know for sure that you will contine to pay this EMI amount each month for the next 15 years.
So in this case, you pay back the bank a total of 48,35,700 Rs. in total, over your tenure of 15 years (assuming no changes to interst rates).
But when you decide to prepay your home loan amount i.e. add more amount to the paid EMI, then the calculations change. Your loan tenure comes down from 15 years.
Say after 1 year of you taking home loan, you got a bonus of 2 lakhs, or you sold your old property and use that money to prepay your existing home loan. So now, because of this prepayment of 2 lakh Rs. after 1 year of you taking the home loan, your total amount paid back to the bank has come down to 43,13,050 and your tenure has also come down from 15 years to 12 years and 10 months. So, because of this prepayment, you managed to save 5,22,675 Rs. and your home loan tension period shortened by 2 years and 2 months. So this is beneficial to you.
However, for the bank, it is a problem. The amount that they were relying upon as a steady stream for 15 years has come down to a lesser amount as well as for a lesser tenure. That is something which hurts their profits, as well as cashflows. Hence, they impose a charge for such prepayments.
Related: Home Loan Tax Benefits and All Home Loan Articles
Is it beneficial for the borrower to prepay his home loan as early as possible?
In short, the answer is YES.
Remember, the longer your loan tenure, the more money you repay to the bank for the same loan amount. Continue to Part II - PrePayment Charges Calculation on Home Loan: How it affects you?
Thursday, 4 August 2011
NRI Home Loan & Property Purchase in India: Details, Procedure, Tax Benefits & Requirements
Details about how NRI (Non-Resident Indians) can purchase property in India and also take home loans from Indian Banks for their property buying
It has now become a common scenario for many Indians - they work for IT or some similar sector companies and their employer sends them abroad to work at client site for long term. Usually this is accompanied by payroll transfer for long term onsite assignment, and hence the employees take the NRI status to avoid double taxation. However, the future still remains uncertain - where to settle down, where to buy property, how to buy it if buying in India, can I get a home loan in India from an Indian Bank or NBFC if buying a property in India, what are the requirements for purchasing property on home loan in India by an NRI. In this article, we will attempt to address these common questions.
Usually, there are no differences for home loans for NRI and that of a resident Indian. However, the loan amount, eligibility, tenure and interest rates charged may be different and that differs from one home loan providing bank to the other.
- Usually, the interest rate charged for NRI Home loans are sometimes higher than that charged to resident Indians - around 0.25% to 0.5% higher
- Maximum Tenure is also usually shorter, but still NRI can get loans for upto 15 years
- Eligibility calculation basis is same as that of resident Indians
- Repayment for EMI's can be made with ECS or post Dated cheques (PDC) or standing instructions on Non-Resident Ordinary (NRO) account or the NRE accounts
What are the home loan tax benefits available for NRI Home loans?
This is a not that tricky, although it appears to be.
Here is the simple scenario for NRI home loans:
1) If you are an NRI, and have income ONLY in foreign country (i.e. no income in India), then you CANNOT get any tax benefit on the home loan you take in India. The reason - you can claim tax benefit in India as per Indian IT rules. Since you do not have any income in India, you need not pay any taxes in India and hence you cannot get that tax benefit.
2) You are an NRI and along with your foreign income, you also have some income in India (say a part of your salary coming from Indian employer or you getting rental income from a property in India). Then, you can claim tax benefit on the NRI home loan you took in India.
For more details, please see Home Loan Tax Benefits.
What are the additional requirements for an NRI to take NRI home loan in India?
There are a few additional requirements for NRI to take home loan in India:
- Any NRI with a valid Indian passport can purchase property in India on NRI home loan
- Home loan amount shouldn't be 85% of the property value
- Individual amount should be from a legal clear channel, if the funds are being sent from abroad - i.e. it should be routed through a clear bank transaction from abroad
- Power of Attorney to a localite in India: NRI taking home loans have this need - they need to provide power of attorney (POA) to a local relative before the home loan is processed and approved. The reason for this requirement is for bank safety as well as for legal formalities. For e.g., it makes it easier for the bank to track down and communicate with a local representative in case of any concerns or queries. Also, for under contrcution properties, there might be legal formalities required multiple times like signing on releasing a portion of funds to the builder, etc. If the power of attorney is there with a local person, it becomes easier to process these steps for NRI Home loan.
What are the tax implications of this property purchase by NRI in the foreign country where they are residing?
The tax implication for the NRI's depend upon the country where they are residing. From whatever we are aware of here are the country wise details:
Related: Home Loan Tax Benefits and All Home Loan Articles
- USA tax implications for NRI property in India:
USA allows for tax deductions if the the house is taken on home loan and there is rental income from the home after the NRI receives the possession and puts it on rent. Remember, US laws require NRI's to pay taxes on their global income, so an NRI in USA having rental income in Indian property needs to pay tax in USA on that income.
One can claim dedcutions for registration charges, agent commission, stamp duty, proeprty insurance, maintenance charges, etc. in USA
- UK tax implications for NRI property in India:
UK does not necessarily require an NRI to pay taxes on global income. It depends upon your domicile, residential status, etc. NRI can claim deduction on the interest on the loan taken for the purchase of the property.
If you have any questions/queries regarding home loans, Insurance or HRA claims, the FT Times team will be happy to address them. Please post your questions in the comments section by clicking on the link "Post a Comment" at the end of this page
- Australia tax implications for NRI property in India:
Like USA, Australia requires you to pay tax on global income. Interest payable on home loan is deductable and all expenses like registration charges, agent commission, stamp duty, proeprty insurance, maintenance charges, etc. can also be deducted.
- Gulf countries tax implications for NRI property in India:
Gulf countries like Dubai (UAE), etc. do not have any tax requirement for global income
It has now become a common scenario for many Indians - they work for IT or some similar sector companies and their employer sends them abroad to work at client site for long term. Usually this is accompanied by payroll transfer for long term onsite assignment, and hence the employees take the NRI status to avoid double taxation. However, the future still remains uncertain - where to settle down, where to buy property, how to buy it if buying in India, can I get a home loan in India from an Indian Bank or NBFC if buying a property in India, what are the requirements for purchasing property on home loan in India by an NRI. In this article, we will attempt to address these common questions.
NRI Home Loans: Procedure, Details and Tax Benefits
What are the major differences for home loans for NRI as compared to that of a resident Indian?Usually, there are no differences for home loans for NRI and that of a resident Indian. However, the loan amount, eligibility, tenure and interest rates charged may be different and that differs from one home loan providing bank to the other.
- Usually, the interest rate charged for NRI Home loans are sometimes higher than that charged to resident Indians - around 0.25% to 0.5% higher
- Maximum Tenure is also usually shorter, but still NRI can get loans for upto 15 years
- Eligibility calculation basis is same as that of resident Indians
- Repayment for EMI's can be made with ECS or post Dated cheques (PDC) or standing instructions on Non-Resident Ordinary (NRO) account or the NRE accounts
What are the home loan tax benefits available for NRI Home loans?
This is a not that tricky, although it appears to be.
Here is the simple scenario for NRI home loans:
1) If you are an NRI, and have income ONLY in foreign country (i.e. no income in India), then you CANNOT get any tax benefit on the home loan you take in India. The reason - you can claim tax benefit in India as per Indian IT rules. Since you do not have any income in India, you need not pay any taxes in India and hence you cannot get that tax benefit.
2) You are an NRI and along with your foreign income, you also have some income in India (say a part of your salary coming from Indian employer or you getting rental income from a property in India). Then, you can claim tax benefit on the NRI home loan you took in India.
For more details, please see Home Loan Tax Benefits.
What are the additional requirements for an NRI to take NRI home loan in India?
There are a few additional requirements for NRI to take home loan in India:
- Any NRI with a valid Indian passport can purchase property in India on NRI home loan
- Home loan amount shouldn't be 85% of the property value
- Individual amount should be from a legal clear channel, if the funds are being sent from abroad - i.e. it should be routed through a clear bank transaction from abroad
- Power of Attorney to a localite in India: NRI taking home loans have this need - they need to provide power of attorney (POA) to a local relative before the home loan is processed and approved. The reason for this requirement is for bank safety as well as for legal formalities. For e.g., it makes it easier for the bank to track down and communicate with a local representative in case of any concerns or queries. Also, for under contrcution properties, there might be legal formalities required multiple times like signing on releasing a portion of funds to the builder, etc. If the power of attorney is there with a local person, it becomes easier to process these steps for NRI Home loan.
What are the tax implications of this property purchase by NRI in the foreign country where they are residing?
The tax implication for the NRI's depend upon the country where they are residing. From whatever we are aware of here are the country wise details:
Related: Home Loan Tax Benefits and All Home Loan Articles
- USA tax implications for NRI property in India:
USA allows for tax deductions if the the house is taken on home loan and there is rental income from the home after the NRI receives the possession and puts it on rent. Remember, US laws require NRI's to pay taxes on their global income, so an NRI in USA having rental income in Indian property needs to pay tax in USA on that income.
One can claim dedcutions for registration charges, agent commission, stamp duty, proeprty insurance, maintenance charges, etc. in USA
- UK tax implications for NRI property in India:
UK does not necessarily require an NRI to pay taxes on global income. It depends upon your domicile, residential status, etc. NRI can claim deduction on the interest on the loan taken for the purchase of the property.
If you have any questions/queries regarding home loans, Insurance or HRA claims, the FT Times team will be happy to address them. Please post your questions in the comments section by clicking on the link "Post a Comment" at the end of this page
- Australia tax implications for NRI property in India:
Like USA, Australia requires you to pay tax on global income. Interest payable on home loan is deductable and all expenses like registration charges, agent commission, stamp duty, proeprty insurance, maintenance charges, etc. can also be deducted.
- Gulf countries tax implications for NRI property in India:
Gulf countries like Dubai (UAE), etc. do not have any tax requirement for global income
Thursday, 14 July 2011
Real Estate Group Discount Offers for Property Home Purchase: Look Before You Leap
There has been a sudden outburst in the business of Group Offers - it started with restaurents, lunch offers, spa's etc. and this group buying scheme has been extended to big buying decisions like those of real estate, property and flat purchases. There have been lots of companies which have now mushroomed up all of a sudden, which promise to offer great discounts on real estate purchases if you sign up for their offers. In this article, we will discuss whether these group discount offer companies really offer any value worth or is it just a commission earning marketing gimmick, which might land the buyers in trouble. Let's start with the basics: 
How do property group offer companies work?
The model for group offers is simple - you start a firm/company with a group offer discount available only if a certain no. of people apply for it jointly in a group.
Now, this is where the so called "Group Offer Companies" try to cash in upon.
Let's see this with an example. There is a group offer company called "GroupOfferX" and There is a restaurent in the city which is not seeing much crowd on weekends in the afternoon during lunch hours. The restaurent wants to have customers come in. So they start offering discounts for the luch time during the weekends.
Restaurent: Get me confirm 100 clients by FRIDAY evening, who would come to dine at my resturent on Saturday Lunch time and I will offer 25% discount to them on the normal charges and another 10% will be paid to GroupOfferX for getting these 100 clients.
GroupOfferX: We will try for that and confirm by Friday evening
Now, the GroupOfferX company puts this offer for 25% discount on their website, send that info through SMS to their subscribers and email marketing and try to gather the required 100 clients.
Suppose the lunch is offered at Rs. 100 per plate, then the GroupOfferX will get 10 Rs. per client, if they manager to get the required 100 clients. The 100 clients only need to pay Rs. 75 (25% less on 100 Rs. lunch).
Typically, a client who is interested in that offer, needs to pay only say 20% of the bill amount for showing interest (i.e. only Rs. 15 for the actual discounted amount of Rs. 75). This is either through online payment or direct debit from bank - these details are usually stored by the GroupOfferX site. Once the GroupOfferX company gets the minimum required 100 clients for that restaurent, the GroupOfferX will then automatically take the remainder amount of Rs 60 from the credit card or net banking for all the 100 clients, confirming the discount offer.
After that, all the 100 (or more) clients are send vouchers through email/sms which they can show at the restaurent and get the discounted lunch.
How is this kind of Group offer beneficial?
It's a win-win situation for all parties.
For the restuarent, it gets increased business, increased popularity as more and more people visit it. It may take a slight hit in the beginning due to discounts being offered, but it can expect visitors to publicize about that restaurent. They save on individual advertising.
For the GroupOfferX company, they get the commission from restaurent
For the end clients, they get a good collective discount, which may not be possible had they gone to the same restaurent on their own
So, for the GroupOfferX company, they are the ones who play the pivotal role or the commission agents or the brokers in all this deal. The above example is for a restaurent, but the same can be extended to other sectors - like spa's, beauty parlours, branded clothes, apparels, jewellery, and now the biggest of all - the real estate or property market especially the homes and apartments.
How does group offers work for Property deals or home purchases?
That is the million dollar question and the biggest of all kinds of the group offers. With internet, email and SMS serving a quick and easy way of sharing information, it has become easy for lots of so called group companies to mushroom around and start claiming to be the best in the discount offers they can make available to their end clients.
First, lets talk about how the Group discount offers work for property or home purchase.
Say a builder is planning to construct a 10 floor building with 60 flats or apartments in it. The site is at a relatively new location, with no proper roads and not much of amenities, but they are expected to be developed in around 2 years time. The builder also expects to complete the building in 2 years time.
But because of the current state of the locality, the builder is not getting much enquiries from clients. To continue construction, he needs partial payments from the buyers, which he cannot afford.
The so called group discount offer company, say RealEstateGroupOffer, and a builder gets into a deal. RealEstateGroupOffer claims that they can get around 40 clients for the builder in 3 months time, provided builder offers them a good discount. Builder agrees to offer say 20% discount to clients coming through RealEstateGroupOffer, provided GroupOfferX gets them minimum 40 clients.
So now, RealEstateGroupOffer company uses its own network of clients (potential flat buyers) who might be looking for purchasing flats for their own use or for investment purpose. So they start advertising for this Group Discount offer for purchasing apartments on their website, through emails and through SMS, to potential customers offering them 15% discount. The balance 5% they will pocket as their commission from the builde.
Interested clients will reply to them and express their willingness to purchase the property. However, the exact details about the property like name/builder/location may still not be disclosed by RealEstateGroupOffer to its clients. The group offers for home purchase works a bit differently than the example of restaurent cited above.
In case of Home buying group offers, the RealEstateGroupOffer company asks the interested clients to assemble at a particular location (some landmark near the actual site) at a particular date and time. The interested people come and then they are taken to the actual site where floor plans, availability, location, etc. is revealed to them.
What are the conditions or problems of Group Discount offers on Property Flat Purchases?
Although some group discount offers may be good and genuine, there are still certain doubts that the buyers must keep in mind and get them clarified.
- What is the real reason that the builder is offering discount on group buying? If its a good project, why is he not getting clients, why is his flats not sold off till now?
- If the builder is offering discount on group bookings, is he doing so for want of money? Is there a possibility that he may face financial problems in future during the construction of the flat if material or labour costs increases?
- Is locality or area the issue?
- Are there any problems about basic amenities - water, electricity connections, roads,
- Is the neighbourhood safe - any liquor shops around, criminal activity record of that area, etc.
- Is it an under-construction project - what is the guarantee that the builder will make it ready in the promised time of 2-3 years?
- Is the RealEstateGroupOffer company or the builder offering any condition for delay in promised possession
What should be checked about the Discount Offers on Group Bookings for Real Estate Or Home Purchase?
There can be many many reasons why the builder is offering group discounts, but its for the buyer to keep himself safe. Here are some checkpoints and conditions which the group discount buyer should be careful about:
- Usually, only unsold under-construction flats in far flung areas are offered by group discount companies.
- Almost all of them are under-construction project having proposed possession timeline mentioned as 2 years or even more (which may further get extended)
- You may be forced to book on the same first day of your site visit, to avail the discount. Remember, purchasing a house is a lifetime decision. Dont fall for the marketing & pressure tactics of these RealEstateGroupOffer companies (& the builder)
- More money to be paid early - you will be asked to pay more money in the early stage itself, in the name of the discount offer. But be careful - you might end up paying high interest on your home loan amount, because of your higher initial payments in the name of group discount bookings. The so called discount will then vanish away.
- Above all - simply keep a suspected eye - why is this being offered at a discount, what can be the reason?
How do property group offer companies work?
The model for group offers is simple - you start a firm/company with a group offer discount available only if a certain no. of people apply for it jointly in a group.
Now, this is where the so called "Group Offer Companies" try to cash in upon.
Let's see this with an example. There is a group offer company called "GroupOfferX" and There is a restaurent in the city which is not seeing much crowd on weekends in the afternoon during lunch hours. The restaurent wants to have customers come in. So they start offering discounts for the luch time during the weekends.
Group Discounts Offers for Property, Real Estate Home Purchase
However, that may still not work, as the restaurent needs to advertise for that discount offer (another cost), and also suffer losses due to discounts. So what they do is either they approach the GroupOfferX company or the GroupOfferX approaches them. They get into a deal like this:Restaurent: Get me confirm 100 clients by FRIDAY evening, who would come to dine at my resturent on Saturday Lunch time and I will offer 25% discount to them on the normal charges and another 10% will be paid to GroupOfferX for getting these 100 clients.
GroupOfferX: We will try for that and confirm by Friday evening
Now, the GroupOfferX company puts this offer for 25% discount on their website, send that info through SMS to their subscribers and email marketing and try to gather the required 100 clients.
Suppose the lunch is offered at Rs. 100 per plate, then the GroupOfferX will get 10 Rs. per client, if they manager to get the required 100 clients. The 100 clients only need to pay Rs. 75 (25% less on 100 Rs. lunch).
Typically, a client who is interested in that offer, needs to pay only say 20% of the bill amount for showing interest (i.e. only Rs. 15 for the actual discounted amount of Rs. 75). This is either through online payment or direct debit from bank - these details are usually stored by the GroupOfferX site. Once the GroupOfferX company gets the minimum required 100 clients for that restaurent, the GroupOfferX will then automatically take the remainder amount of Rs 60 from the credit card or net banking for all the 100 clients, confirming the discount offer.
After that, all the 100 (or more) clients are send vouchers through email/sms which they can show at the restaurent and get the discounted lunch.
How is this kind of Group offer beneficial?
It's a win-win situation for all parties.
For the restuarent, it gets increased business, increased popularity as more and more people visit it. It may take a slight hit in the beginning due to discounts being offered, but it can expect visitors to publicize about that restaurent. They save on individual advertising.
For the GroupOfferX company, they get the commission from restaurent
For the end clients, they get a good collective discount, which may not be possible had they gone to the same restaurent on their own
So, for the GroupOfferX company, they are the ones who play the pivotal role or the commission agents or the brokers in all this deal. The above example is for a restaurent, but the same can be extended to other sectors - like spa's, beauty parlours, branded clothes, apparels, jewellery, and now the biggest of all - the real estate or property market especially the homes and apartments.
How does group offers work for Property deals or home purchases?
That is the million dollar question and the biggest of all kinds of the group offers. With internet, email and SMS serving a quick and easy way of sharing information, it has become easy for lots of so called group companies to mushroom around and start claiming to be the best in the discount offers they can make available to their end clients.
First, lets talk about how the Group discount offers work for property or home purchase.
Say a builder is planning to construct a 10 floor building with 60 flats or apartments in it. The site is at a relatively new location, with no proper roads and not much of amenities, but they are expected to be developed in around 2 years time. The builder also expects to complete the building in 2 years time.
But because of the current state of the locality, the builder is not getting much enquiries from clients. To continue construction, he needs partial payments from the buyers, which he cannot afford.
The so called group discount offer company, say RealEstateGroupOffer, and a builder gets into a deal. RealEstateGroupOffer claims that they can get around 40 clients for the builder in 3 months time, provided builder offers them a good discount. Builder agrees to offer say 20% discount to clients coming through RealEstateGroupOffer, provided GroupOfferX gets them minimum 40 clients.
So now, RealEstateGroupOffer company uses its own network of clients (potential flat buyers) who might be looking for purchasing flats for their own use or for investment purpose. So they start advertising for this Group Discount offer for purchasing apartments on their website, through emails and through SMS, to potential customers offering them 15% discount. The balance 5% they will pocket as their commission from the builde.
Interested clients will reply to them and express their willingness to purchase the property. However, the exact details about the property like name/builder/location may still not be disclosed by RealEstateGroupOffer to its clients. The group offers for home purchase works a bit differently than the example of restaurent cited above.
In case of Home buying group offers, the RealEstateGroupOffer company asks the interested clients to assemble at a particular location (some landmark near the actual site) at a particular date and time. The interested people come and then they are taken to the actual site where floor plans, availability, location, etc. is revealed to them.
What are the conditions or problems of Group Discount offers on Property Flat Purchases?
Although some group discount offers may be good and genuine, there are still certain doubts that the buyers must keep in mind and get them clarified.
- What is the real reason that the builder is offering discount on group buying? If its a good project, why is he not getting clients, why is his flats not sold off till now?
- If the builder is offering discount on group bookings, is he doing so for want of money? Is there a possibility that he may face financial problems in future during the construction of the flat if material or labour costs increases?
- Is locality or area the issue?
- Are there any problems about basic amenities - water, electricity connections, roads,
- Is the neighbourhood safe - any liquor shops around, criminal activity record of that area, etc.
- Is it an under-construction project - what is the guarantee that the builder will make it ready in the promised time of 2-3 years?
- Is the RealEstateGroupOffer company or the builder offering any condition for delay in promised possession
What should be checked about the Discount Offers on Group Bookings for Real Estate Or Home Purchase?
There can be many many reasons why the builder is offering group discounts, but its for the buyer to keep himself safe. Here are some checkpoints and conditions which the group discount buyer should be careful about:
- Usually, only unsold under-construction flats in far flung areas are offered by group discount companies.
- Almost all of them are under-construction project having proposed possession timeline mentioned as 2 years or even more (which may further get extended)
- You may be forced to book on the same first day of your site visit, to avail the discount. Remember, purchasing a house is a lifetime decision. Dont fall for the marketing & pressure tactics of these RealEstateGroupOffer companies (& the builder)
- More money to be paid early - you will be asked to pay more money in the early stage itself, in the name of the discount offer. But be careful - you might end up paying high interest on your home loan amount, because of your higher initial payments in the name of group discount bookings. The so called discount will then vanish away.
- Above all - simply keep a suspected eye - why is this being offered at a discount, what can be the reason?
Monday, 11 July 2011
Home Insurance for Home Loan: The Truth, Details & Actual Coverage of Home Insurance Policy
Home Insurance Details, Truth & Requirements
It was recently that I purchased a home by taking a home loan. I was made to (or better to say "forced to") take a home insurance also, along with my home loan. Now that policy detail was not shared with me earlier by the home loan providing bank, rather I was simply asked to pay for that insurance without much of discussion. So there it was - I had to get a demand draft for the home insurance premium and give it to my home loan provider bank, and the bank person would in turn pass it on to the insurance provider company who would then issue the policy for "securing" my home from all (??) kinds of calamities.
But then, even after paying for the insurance premium, I had no idea of what I was paying for (nor did the bank personnel seem to have, as whatever I asked him, he just kept turning down my questions by saying - Since you are taking a home loan, this home insurance policy is essential)
So, after more than a month of home loan disbursal, I got the printed copy of my home insurance policy which was essential for my home loan. And there the surprises started.
Let me detail somethings which came out after a few follow-ups with the insurance company, about the truth of home insurance.
First, my observations about my own home insurance policy.
The first shocker was the one about the SUM ASSURED for my home insurance, and that's where I got into q and a's with the insurance company helpdesk.
The price of my purchased home was, say X. Add to it the registration and stamp duty cost, and the overall price rises to X+12%. Out of this, my home loan amount was only X*65% i.e. around 2/3rd of the total home price.
What was interesting is that I took this home loan for around 10 years, and was forced to buy home insurance policy for a tenure fo 10 years (i.e. loan period) by paying a one time premium, yet the sum assured amount mentioned on the policy document was only aroun 40% of X
So, if my home was of say, 50 Lakhs total cost, the insurance policy which was forced onto me was having the sum assured only as 20 Lakhs. So what is the actual worth of my insurance I'm forced to purchase???
I logged a query with the insurance company and that is what they came up with.
Irrespective of the amount of total money you pay to buy your home, irrespective of the amount of home loan you take, your home insurance policy ONLY covers the cost of construction for your house. i.e. in case something goes wrong with the flat due to say any natural calamity, then the home insurance policy only covers the cost of reconstructing that property.
It is in turn dependent on the area of construction (usually the carpet area) and interestingly, the locality where your property is located.
If you have any questions/queries regarding home loans, Insurance or HRA claims, the FT Times team will be happy to address them. Please post your questions in the comments section by clicking on the link "Post a Comment" at the end of this page
Although it sounds absolutely logical to take the cost of construction (hence insurance value) to be a factor of the carpet area, but it makes no sense to make it dependent on the locality within the same city. How will the cost of construction change significantly if the area is under the same city?
Although I've been insisting on the insurance company to give a written confirmation on this to me through email - they are trying to avoid it. Even though I've asked them explicitly to provide a written response through email, they simply call on my mobile and avoid putting the answers in writing.
Related: Home Loan Tax Benefits and All Home Loan Articles
So, there is nothing much that an individual can do about the choices he/she has for home insurance. The moment someone takes a home loan, he has to purchase some or the other stupid policy in the name of coverage. Some banks force only property insurance, some also force life insurance that too in favour of the home loan bank. With the property papers lying in the custody of the home loan provider bank, the home itself is the biggest security for the bank against the loan it has provided. So why should there be a force on the home insurance or life insurance?
Something for the authorities to think about and come to the rescue of the individuals.
It was recently that I purchased a home by taking a home loan. I was made to (or better to say "forced to") take a home insurance also, along with my home loan. Now that policy detail was not shared with me earlier by the home loan providing bank, rather I was simply asked to pay for that insurance without much of discussion. So there it was - I had to get a demand draft for the home insurance premium and give it to my home loan provider bank, and the bank person would in turn pass it on to the insurance provider company who would then issue the policy for "securing" my home from all (??) kinds of calamities.
But then, even after paying for the insurance premium, I had no idea of what I was paying for (nor did the bank personnel seem to have, as whatever I asked him, he just kept turning down my questions by saying - Since you are taking a home loan, this home insurance policy is essential)
Home Insurance Policy: Truth, Details & Requirements of Home Loan Insurance Policy
So, after more than a month of home loan disbursal, I got the printed copy of my home insurance policy which was essential for my home loan. And there the surprises started.
Let me detail somethings which came out after a few follow-ups with the insurance company, about the truth of home insurance.
First, my observations about my own home insurance policy.
The first shocker was the one about the SUM ASSURED for my home insurance, and that's where I got into q and a's with the insurance company helpdesk.
The price of my purchased home was, say X. Add to it the registration and stamp duty cost, and the overall price rises to X+12%. Out of this, my home loan amount was only X*65% i.e. around 2/3rd of the total home price.
What was interesting is that I took this home loan for around 10 years, and was forced to buy home insurance policy for a tenure fo 10 years (i.e. loan period) by paying a one time premium, yet the sum assured amount mentioned on the policy document was only aroun 40% of X
So, if my home was of say, 50 Lakhs total cost, the insurance policy which was forced onto me was having the sum assured only as 20 Lakhs. So what is the actual worth of my insurance I'm forced to purchase???
I logged a query with the insurance company and that is what they came up with.
Irrespective of the amount of total money you pay to buy your home, irrespective of the amount of home loan you take, your home insurance policy ONLY covers the cost of construction for your house. i.e. in case something goes wrong with the flat due to say any natural calamity, then the home insurance policy only covers the cost of reconstructing that property.
It is in turn dependent on the area of construction (usually the carpet area) and interestingly, the locality where your property is located.
If you have any questions/queries regarding home loans, Insurance or HRA claims, the FT Times team will be happy to address them. Please post your questions in the comments section by clicking on the link "Post a Comment" at the end of this page
Although it sounds absolutely logical to take the cost of construction (hence insurance value) to be a factor of the carpet area, but it makes no sense to make it dependent on the locality within the same city. How will the cost of construction change significantly if the area is under the same city?
Although I've been insisting on the insurance company to give a written confirmation on this to me through email - they are trying to avoid it. Even though I've asked them explicitly to provide a written response through email, they simply call on my mobile and avoid putting the answers in writing.
Related: Home Loan Tax Benefits and All Home Loan Articles
So, there is nothing much that an individual can do about the choices he/she has for home insurance. The moment someone takes a home loan, he has to purchase some or the other stupid policy in the name of coverage. Some banks force only property insurance, some also force life insurance that too in favour of the home loan bank. With the property papers lying in the custody of the home loan provider bank, the home itself is the biggest security for the bank against the loan it has provided. So why should there be a force on the home insurance or life insurance?
Something for the authorities to think about and come to the rescue of the individuals.
Friday, 8 July 2011
Home Loan: High Low Interest Rates High Low Property Prices Best Time To Take a Home Loan
Very often, I come across people asking this question - "When should a home loan be taken?" Should it be when the interest rates are high or should it be when the home loan interest rates are low? What is a low interest rate range? What is the right time to take a home loan?
In this article, I will explain the Mathematics and scenarios about house or property prices with respect to low and high interest rates for home loans
Let's see -
Section 1: Please understand clearly that when you buy a house on home loan, there are 2 components of it:
1) The Fixed Price Component - this is the amount that you pay to the builder. Remember that a part of this comes from you savings, a part from the home loan. This fixed component depends upon the property rate (per sq. ft. cost) and is a determinent of one time cost. i.e. once you pay the total amount to the builder and get the possession of the flat, you dont need to worry about this.
2) The variable component - this is the component that keeps changing i.e. since you've taken a home loan, and it is 99% that you have taken it on floating interest rates, it is quite possible that the interest rates will keep on changing (or better to say that they will keep on increasing). Hence, this introduces a variable component in your house purchase transaction and this is a repeated recurring cost.
Related: Home Loan Tax Benefits and All Home Loan Articles
Now, coming back to our question on what is the right time to buy a house on loan?
Section 2:
1) Please note that usually, when the home loan interest rates are high, the property prices will be a bit low because there will be less demand. Hence, builders will be willing to negotiate and bring down the prices.
2) The reverse happens when the home loan interest rates are low. Generally, builders will increase the cost of property to astronomical levels, buyers will not mind paying that high price since the loan are available for cheap leading to low EMI payments.
So, what can be done to determine the right time to buy a house? Club both the things discussed in Section 1 and 2 together. The fixed price component is something which you have to pay one time. It's better to keep it low. And it will be low when the first scenario of high interest rates will occur i.e. high interest rates means less money with people, high cost of loan, so less borrowers hence less demand and thereby a decline in property prices leading to less fixed cost.
How is this beneficial?
First, you pay less fixed cost. The drawback is that you take home loan at higher interest rates. But it still works in your favour. Since you are taking a higher interest loan, your initial EMI payments will be higher. When the economic cycle turns around in 2-3 years time, the interest rates will start coming down. Hence, you can expect you EMI payments to come down.
It is quite possible that in countries like India you may not see the banks decreasing the interest rates even if the overall interest rates are coming down. However, you can still bargain with your existing home loan provider bank and see if they are ready to bring down the rates. If not, then you can approach the other banks to get your remaining home loan repayment taken over as a new home loan and you get the benefit of the low interest rates.
Hence, overall you pay less fixed price at the start, and later also your EMI payments come down in the long run making it beneficial to you.
If you have any questions/queries regarding home loans or HRA claims, the FT Times team will be happy to address them. Please post your questions in the comments section by clicking on the link "Post a Comment" at the end of this page
Now consider other case: You buy home on loan when interest rates are less and home prices are at peak.
The problem with this scenario is that your fixed cost that you pay to the builder is high. Property rates will be at their peak, everyone will be blindly investing like mad, so high demand backed by low interest rates will mean high proeprty prices.
The initial benefit will be low EMI payments because of low interest rates. But in the long run it might turn against you. When the economy switches modes, i.e. low interest rates turning out to be high interst rates, it will increase your EMI significantly causing your recurring high cost, month after month. And remember, this will happen when the economy will become tight - less salary hikes, high inflation, less purchasing power and less money. So it is a bad situation overall.
Therefore, weigh your options properly. Consider your financial situation and the current state of economy and the interest rates, property rates and then go for a deal. Purchase wisely, dont follow the herd mentality. After all, its a once in a life tiem purchase of house
In this article, I will explain the Mathematics and scenarios about house or property prices with respect to low and high interest rates for home loans
Home Interest Rates & House Property Prices: Best time to buy
If you are reading this article, that indicates you are seriously considering purchasing a house on loan. The big questions facing you is - are the current rates quoted by the builder right at this time? Are the home loan interest rates correct for taking home loan? is this the right time to get into this transaction of buying home on loan or should you wait for some more time?
Let's see -
Section 1: Please understand clearly that when you buy a house on home loan, there are 2 components of it:
1) The Fixed Price Component - this is the amount that you pay to the builder. Remember that a part of this comes from you savings, a part from the home loan. This fixed component depends upon the property rate (per sq. ft. cost) and is a determinent of one time cost. i.e. once you pay the total amount to the builder and get the possession of the flat, you dont need to worry about this.
2) The variable component - this is the component that keeps changing i.e. since you've taken a home loan, and it is 99% that you have taken it on floating interest rates, it is quite possible that the interest rates will keep on changing (or better to say that they will keep on increasing). Hence, this introduces a variable component in your house purchase transaction and this is a repeated recurring cost.
Related: Home Loan Tax Benefits and All Home Loan Articles
Now, coming back to our question on what is the right time to buy a house on loan?
Section 2:
1) Please note that usually, when the home loan interest rates are high, the property prices will be a bit low because there will be less demand. Hence, builders will be willing to negotiate and bring down the prices.
2) The reverse happens when the home loan interest rates are low. Generally, builders will increase the cost of property to astronomical levels, buyers will not mind paying that high price since the loan are available for cheap leading to low EMI payments.
So, what can be done to determine the right time to buy a house? Club both the things discussed in Section 1 and 2 together. The fixed price component is something which you have to pay one time. It's better to keep it low. And it will be low when the first scenario of high interest rates will occur i.e. high interest rates means less money with people, high cost of loan, so less borrowers hence less demand and thereby a decline in property prices leading to less fixed cost.
How is this beneficial?
First, you pay less fixed cost. The drawback is that you take home loan at higher interest rates. But it still works in your favour. Since you are taking a higher interest loan, your initial EMI payments will be higher. When the economic cycle turns around in 2-3 years time, the interest rates will start coming down. Hence, you can expect you EMI payments to come down.
It is quite possible that in countries like India you may not see the banks decreasing the interest rates even if the overall interest rates are coming down. However, you can still bargain with your existing home loan provider bank and see if they are ready to bring down the rates. If not, then you can approach the other banks to get your remaining home loan repayment taken over as a new home loan and you get the benefit of the low interest rates.
Hence, overall you pay less fixed price at the start, and later also your EMI payments come down in the long run making it beneficial to you.
If you have any questions/queries regarding home loans or HRA claims, the FT Times team will be happy to address them. Please post your questions in the comments section by clicking on the link "Post a Comment" at the end of this page
Now consider other case: You buy home on loan when interest rates are less and home prices are at peak.
The problem with this scenario is that your fixed cost that you pay to the builder is high. Property rates will be at their peak, everyone will be blindly investing like mad, so high demand backed by low interest rates will mean high proeprty prices.
The initial benefit will be low EMI payments because of low interest rates. But in the long run it might turn against you. When the economy switches modes, i.e. low interest rates turning out to be high interst rates, it will increase your EMI significantly causing your recurring high cost, month after month. And remember, this will happen when the economy will become tight - less salary hikes, high inflation, less purchasing power and less money. So it is a bad situation overall.
Therefore, weigh your options properly. Consider your financial situation and the current state of economy and the interest rates, property rates and then go for a deal. Purchase wisely, dont follow the herd mentality. After all, its a once in a life tiem purchase of house
Wednesday, 8 June 2011
Tax Benefit On Home Loan
Details about Tax Benefit On Home Loan as per the Income Tax Guidelines for year 2011 With the increasing real estate prices, especially in metro cities, it is next to impossible for an individual to purchase a house on their own. The only option left for him/her is to go for a Home loan or a House Loan. Although its a big long term commitment to take a home loan, but there are certain benefits attached to it in terms of Tax deductions on home loan or commonly known as Home Loan Tax Benefits. Let's see all the possible scenarios which an individual (or joint applicants) can fall into after taking a home loan, and we explain what all tax benefits can be achieved for home loan borrowers, as per the Income Tax rules of the year 2011.
Good news is that as per the Income Tax rules for the financial year 2011-2012, both the above mentioned components of home loan qualify for tax rebate. Here are the details:
On the Interest Component Payment - Tax rebate is possible under section 24(b) upto a maximum of Rs. 1.5 Lakhs.
On the Principle Component Payment - Tax rebate is possible under section 80C, but there is a OVERALL limit on section 80C of 1 Lakh.
But, please note that there are 2 important conditions to be met for claiming the tax benefits on Home Loan:
1. The applicant must have taken the Home loan after April 1st, 1999.
2. The possession of the property must be within 3 years from the year in which loan was taken by the borrower.
Hence, in total, in a given financial year (say April 2011 to March 2012), you can claim a MAXIMUM tax rebate of Rs. 2.5 Lakhs for your Home Loan Repayment. However, note the use of the word MAXIMUM - one hardly gets a chance to claim the entire 2.5 lakhs tax benefit. How? Let's see.
Please note that these are "DEDUCTIONS". Hence, whatever qualifying amount you are eligble for (say 2.5 Lakhs), that gets deducted from your income completely. To understand this, let's say there is a salaried person who has an annual income from salary as 7 lakhs. Now, if he manages to get the full 2.5 lakh tax deduction for his home loan, then his net taxable income comes down to only (7-2.5) = 4.5 Lakhs only.
So how does he benefit?
Earlier, his taxable income wa 7 lakhs which took him to 20% tax bracket as per the Income tax slabs 2011-2012 for General tax payers.
After taking the home loan and being eligible for maximum home loan tax rebate of 2.5 Lakhs, his taxable income has come down to just 4.5 Lakhs. Hence, he is now in 10% tax bracket.
That's a big benefit - coming down from 20% tax bracket to 10% tax bracket.
Related: All Home Loan Articles
If you have any questions/queries regarding home loans or HRA claims, the FT Times team will be happy to address them. Please post your questions in the comments section by clicking on the link "Post a Comment" at the end of this page
The tax benefit you can claim depends upon what you are repaying as interest and what you are repaying as principle of your home loan component.
As mentioned above, On the Interest Component Payment - Tax rebate is possible under section 24(b) upto a maximum of Rs. 1.5 Lakhs. Generally, there is no problem in claiming tax benefit for this interest component. Why? Because there are no other things clubbed with section 24(b). Now a days, with EMI's running in the range of 30K per month, on an annual basis it is possible that you end up paying more than 1.5 lakh rupees as interest component. Hence, it is possible to claim full 1.5 Lakh as interest component tax benefit.
Continue further to details of Tax Benfits available on Principle repayment of home loan in the article: Home Loan Tax Benefit
Tax Benefits, Tax Rebates, Tax Deductions available On Home Loan
Let's begin with the basics first: We all know that once you take a home loan, you need to repay that through EMI. The EMI you repay each month to the bank is made up of two components - (1) Your INTEREST accrued on the Loan amount and (2) the part which goes to PRINCIPLE Loan Amount. In the remainder of this article, we will refer them as Interest and Principle components.Good news is that as per the Income Tax rules for the financial year 2011-2012, both the above mentioned components of home loan qualify for tax rebate. Here are the details:
On the Interest Component Payment - Tax rebate is possible under section 24(b) upto a maximum of Rs. 1.5 Lakhs.
On the Principle Component Payment - Tax rebate is possible under section 80C, but there is a OVERALL limit on section 80C of 1 Lakh.
But, please note that there are 2 important conditions to be met for claiming the tax benefits on Home Loan:
1. The applicant must have taken the Home loan after April 1st, 1999.
2. The possession of the property must be within 3 years from the year in which loan was taken by the borrower.
Hence, in total, in a given financial year (say April 2011 to March 2012), you can claim a MAXIMUM tax rebate of Rs. 2.5 Lakhs for your Home Loan Repayment. However, note the use of the word MAXIMUM - one hardly gets a chance to claim the entire 2.5 lakhs tax benefit. How? Let's see.
Please note that these are "DEDUCTIONS". Hence, whatever qualifying amount you are eligble for (say 2.5 Lakhs), that gets deducted from your income completely. To understand this, let's say there is a salaried person who has an annual income from salary as 7 lakhs. Now, if he manages to get the full 2.5 lakh tax deduction for his home loan, then his net taxable income comes down to only (7-2.5) = 4.5 Lakhs only.
So how does he benefit?
Earlier, his taxable income wa 7 lakhs which took him to 20% tax bracket as per the Income tax slabs 2011-2012 for General tax payers.
After taking the home loan and being eligible for maximum home loan tax rebate of 2.5 Lakhs, his taxable income has come down to just 4.5 Lakhs. Hence, he is now in 10% tax bracket.
That's a big benefit - coming down from 20% tax bracket to 10% tax bracket.
Related: All Home Loan Articles
If you have any questions/queries regarding home loans or HRA claims, the FT Times team will be happy to address them. Please post your questions in the comments section by clicking on the link "Post a Comment" at the end of this page
The tax benefit you can claim depends upon what you are repaying as interest and what you are repaying as principle of your home loan component.
As mentioned above, On the Interest Component Payment - Tax rebate is possible under section 24(b) upto a maximum of Rs. 1.5 Lakhs. Generally, there is no problem in claiming tax benefit for this interest component. Why? Because there are no other things clubbed with section 24(b). Now a days, with EMI's running in the range of 30K per month, on an annual basis it is possible that you end up paying more than 1.5 lakh rupees as interest component. Hence, it is possible to claim full 1.5 Lakh as interest component tax benefit.
Continue further to details of Tax Benfits available on Principle repayment of home loan in the article: Home Loan Tax Benefit
Home Loan Tax Benefit
Continuing our series on home loan articles, in this article we discuss the case of Tax Benefits on Principle repayment on Home Loans. Previous article was on Tax Benefit on Interest Rate Repayment of Home Loan. You can have a look at the other Home loan Tax Benefits Scenarios at All Home Loan Articles where we discuss various scenarios on eligibility for home loan tax benefits.
The problem is with the component of Principle repayment of home loan. Why? The reason is that this component is considered under section 80C of the IT act. Unfortunately, there are lot more other investments which are clubbed in section 80C, and the ENTIRE SUM TOTAL of all these components has a maximum tax benefit limit set to 1 Lakh ONLY.
What are the other Components clubbed into Section 80C along with Principle Portion of Home Loan Repayment for Tax Benefit?
Along with Principle Portion of Home Loan Repayment, there are Provident Fund, PPF, NSC Savings, Life Insurance Premium, ELSS, Pension Funds, Tax Savings Fixed Deposits, etc. For a full list of what all is covered, please see our article on Tax Benefit Section 80C.
Now that causes a problem - especially for salaried class people. Usually, Provident Fund gets deducted for each salaried person and that takes away the cream (or majority) of investment under section 80C. If your annual PF contribution is Rs 60,000, then you only have another 40K left for claiming tax benefit under section 80C.
Add to that a scenario if you also have a Life Insurance Policy with annual premium of Rs. 15K, then you are left with only 25K. Hence, to consider your tax benefit eligibility for repaying as principle of your home loan component, you must sum up all the investments/expenses you are making under section 80C. If that sum crosses 1 lakh, then you cannot claim any tax benefit for repaying as principle of your home loan component.
If that does not cross 1 Lakh (say it is only 75K), then the maximum you can claim for tax benefit on the principle home loan component is 25K.
Related: All Home Loan Articles
If you have any questions/queries regarding home loans or HRA claims, the FT Times team will be happy to address them. Please post your questions in the comments section by clicking on the link "Post a Comment" at the end of this page
Let's see that with an example.
Scenario No 1: Home Loan & Home Possession in the same Financial Year: i.e. say you took the home loan in April 2011 and got the possession of your home in February 2012 (both in same financial year (Apr 2011 to March 2012)
Suppose you are paying an EMI of Rs. 35,000 per month. So total you pay 35K *12 months = 4.2 Lakhs.
Out of this, suppose your interest component is 3.5 Lakhs and Principle component of home loan repayment is 70K.
Now, since the maximum limit on interest repayment tax benefit under section 24(b) is 1.5 Lakhs, your interest tax benefit will be only 1.5 lakhs, even though you have repayed 3.5 lakhs for interest component repayment.
Now come to the principle repayment, which is 70,000.
Here this comes under section 80C, which has a collective limit of 1 Lakh ONLY. Hence, if you are having Provident fund of Rs 60,000 and have also taken an Life Insurance policy of 20,000 making it a total of 80,000, then you have only (1Lakh - 80K) = 20K left for claiming principle repayment on home loan.
So even though you repayed 70,00 as principle of your home loan component, you can claim only 20,000 in the given scenario.
Scenario 2: Home Loan taken NOW for under-construction property. Possession received in next Financial Year: This is the typical scenario which occurs mostly. You book a flat in an under construction apartment. The builder promises possession after 1 year taking it to next financial year. So here is the example: Continue to next article Tax benefit on Pre-EMI home loan payment for under construction property
The problem is with the component of Principle repayment of home loan. Why? The reason is that this component is considered under section 80C of the IT act. Unfortunately, there are lot more other investments which are clubbed in section 80C, and the ENTIRE SUM TOTAL of all these components has a maximum tax benefit limit set to 1 Lakh ONLY.
What are the other Components clubbed into Section 80C along with Principle Portion of Home Loan Repayment for Tax Benefit?
Along with Principle Portion of Home Loan Repayment, there are Provident Fund, PPF, NSC Savings, Life Insurance Premium, ELSS, Pension Funds, Tax Savings Fixed Deposits, etc. For a full list of what all is covered, please see our article on Tax Benefit Section 80C.
Now that causes a problem - especially for salaried class people. Usually, Provident Fund gets deducted for each salaried person and that takes away the cream (or majority) of investment under section 80C. If your annual PF contribution is Rs 60,000, then you only have another 40K left for claiming tax benefit under section 80C.
Add to that a scenario if you also have a Life Insurance Policy with annual premium of Rs. 15K, then you are left with only 25K. Hence, to consider your tax benefit eligibility for repaying as principle of your home loan component, you must sum up all the investments/expenses you are making under section 80C. If that sum crosses 1 lakh, then you cannot claim any tax benefit for repaying as principle of your home loan component.
If that does not cross 1 Lakh (say it is only 75K), then the maximum you can claim for tax benefit on the principle home loan component is 25K.
Related: All Home Loan Articles
If you have any questions/queries regarding home loans or HRA claims, the FT Times team will be happy to address them. Please post your questions in the comments section by clicking on the link "Post a Comment" at the end of this page
Let's see that with an example.
Scenario No 1: Home Loan & Home Possession in the same Financial Year: i.e. say you took the home loan in April 2011 and got the possession of your home in February 2012 (both in same financial year (Apr 2011 to March 2012)
Suppose you are paying an EMI of Rs. 35,000 per month. So total you pay 35K *12 months = 4.2 Lakhs.
Out of this, suppose your interest component is 3.5 Lakhs and Principle component of home loan repayment is 70K.
Now, since the maximum limit on interest repayment tax benefit under section 24(b) is 1.5 Lakhs, your interest tax benefit will be only 1.5 lakhs, even though you have repayed 3.5 lakhs for interest component repayment.
Now come to the principle repayment, which is 70,000.
Here this comes under section 80C, which has a collective limit of 1 Lakh ONLY. Hence, if you are having Provident fund of Rs 60,000 and have also taken an Life Insurance policy of 20,000 making it a total of 80,000, then you have only (1Lakh - 80K) = 20K left for claiming principle repayment on home loan.
So even though you repayed 70,00 as principle of your home loan component, you can claim only 20,000 in the given scenario.
Scenario 2: Home Loan taken NOW for under-construction property. Possession received in next Financial Year: This is the typical scenario which occurs mostly. You book a flat in an under construction apartment. The builder promises possession after 1 year taking it to next financial year. So here is the example: Continue to next article Tax benefit on Pre-EMI home loan payment for under construction property
Home Loan Pre-EMI Tax Benefit for Under Construction Property
Continuing our series on home loan articles, in this article we discuss the case of Tax Benefits on Home Loan Reapyment for under construction property and pre-EMI. Previous article was on Tax Benefit on Principle Repayment of Home Loan.
Scenario 2: Home Loan taken NOW for under-construction property. Possession received in next Financial Year: This is the typical scenario which occurs mostly. You book a flat in an under construction apartment. The builder promises possession after 1 year taking it to next financial year. So here is the example:
EMI starts in Apr, 2010
Possession of Home Received in Jan, 2012 (next financial year with respect to EMI starting year)
Monthly EMI in pre-possession year, say 20,000
Annual EMI for 1 year in pre-possession = 2,40,000
Principal part of EMI in pre-possession 60,000
Interest part of EMI in pre-possession 180,000
20% of the Interest part of EMI in pre-possession period: 36,000
EMI after possession 20,000
Annual EMI after possession 240,000
Principal part of EMI after possession 60,000
Interest part of EMI after possession 180,000
Related: All Home Loan Articles
If you have any questions/queries regarding home loans or HRA claims, the FT Times team will be happy to address them. Please post your questions in the comments section by clicking on the link "Post a Comment" at the end of this page
Now because of this pre-possession period, tax benefit on home loan changes.
During the pre-possession period, you can claim tax benefit ONLY on the PRINCIPLE component under section 80C. So as per the above example, in the financial year 2010-11, you can claim tax benefit only on the 60,000 Rs. you paid for the principal component. You CANNOT claim anything for the interest part during the pre-possession period or the PRE-EMI period.
Come next financial year i.e. the year in which you get the possession, now you can claim for both Interest as well as Principal amount repayment.
Hence, in the year 2011-12, you are paying interest of 180,000, so you can claim for the maximum tax benefit upto the limit of 150,000.
For the principal part of your home loan after possession, same rules apply for the section 80C (collective tax benefit of Rs. 1 lakh).
Then, how about the interest you repaid during the pre-emi period?
Although you cannot claim any tax benefit for the interest paid on your home loan during the pre-EMI period, you can still avail some tax deductions once you get the possession of your home.
As per the rules, once you get the possession, you can get tax rebate for the amount of interest you paid during the pre-EMI period, but in 5 annual installments. i.e. each year you can claim a maximum of 20% or 1/5th portion of the pre-EMI interest component payment on your home loan.
However, there is an additional condition attached to claiming this pre-EMI tax benefit after getting the home possession. That is, your total interest component (Current Year post-possession interest component + Previous year's 20% pre-EMI interest component) cannot exceed 1.5 Lakhs limit.
Hence, in the example above, since post-possession, your Interest part is 180,000 and 20% of your pre-EMI interest part is 36,000 taking the total to 216,000. You can still only claim for a maximum of 1.5 Lakhs only for interest.
If you have any questions/queries regarding home loans or HRA claims, the FT Times team will be happy to address them. Please post your questions in the comments section by clicking on the link "Post a Comment" at the end of this page
Scenario 3: Home Loan taken and Possession of home received. But currently NOT staying in the loaned Home: This might happen in case you purchase a home on loan, get the possession, but then due to say work related requirements you shift to another city.
Hence, you can leave your home vacant or put it on rent.
The conditions in scenario 1 applies.
But please note in case you put the house on rent, you are earning rent from it. That rent should be added to your taxable income, apart from the tax benefits you will get from home loan as mentioned in scenario 1 or scenario 2.
Scenario 4: Can I claim both Home Loan Tax benefit and HRA (House Rent Allowance)?
YES. That is possible. Many individuals believe that they cannot claim HRA and Home Loan Tax benefits at the same time, even many corporate office's finance and payroll department do not accept such claims from the employees, but as per the IT rules, it is very much possible to claim both HRA and Home Loan Tax Benefit. However, again there are multiple scenarios depending upon which one can and cannot claim both HRA and Home Loan Benefit.
To explain that scenario, we encourage you to check our dedicated article HRA & Home Loan Tax Benefit can be Claimed Together
But before taking a decision on Home Loans, do check the benefits of going for a Joint Home Loan, where your tax savings can be multi-folds, depending upon the no. of applicants. Although there are some disadvantages also, see the next article on Joint Home Loan Tax Benefits
Scenario 2: Home Loan taken NOW for under-construction property. Possession received in next Financial Year: This is the typical scenario which occurs mostly. You book a flat in an under construction apartment. The builder promises possession after 1 year taking it to next financial year. So here is the example:
EMI starts in Apr, 2010
Possession of Home Received in Jan, 2012 (next financial year with respect to EMI starting year)
Monthly EMI in pre-possession year, say 20,000
Annual EMI for 1 year in pre-possession = 2,40,000
Principal part of EMI in pre-possession 60,000
Interest part of EMI in pre-possession 180,000
20% of the Interest part of EMI in pre-possession period: 36,000
EMI after possession 20,000
Annual EMI after possession 240,000
Principal part of EMI after possession 60,000
Interest part of EMI after possession 180,000
Related: All Home Loan Articles
If you have any questions/queries regarding home loans or HRA claims, the FT Times team will be happy to address them. Please post your questions in the comments section by clicking on the link "Post a Comment" at the end of this page
Now because of this pre-possession period, tax benefit on home loan changes.
During the pre-possession period, you can claim tax benefit ONLY on the PRINCIPLE component under section 80C. So as per the above example, in the financial year 2010-11, you can claim tax benefit only on the 60,000 Rs. you paid for the principal component. You CANNOT claim anything for the interest part during the pre-possession period or the PRE-EMI period.
Come next financial year i.e. the year in which you get the possession, now you can claim for both Interest as well as Principal amount repayment.
Hence, in the year 2011-12, you are paying interest of 180,000, so you can claim for the maximum tax benefit upto the limit of 150,000.
For the principal part of your home loan after possession, same rules apply for the section 80C (collective tax benefit of Rs. 1 lakh).
Then, how about the interest you repaid during the pre-emi period?
Although you cannot claim any tax benefit for the interest paid on your home loan during the pre-EMI period, you can still avail some tax deductions once you get the possession of your home.
As per the rules, once you get the possession, you can get tax rebate for the amount of interest you paid during the pre-EMI period, but in 5 annual installments. i.e. each year you can claim a maximum of 20% or 1/5th portion of the pre-EMI interest component payment on your home loan.
However, there is an additional condition attached to claiming this pre-EMI tax benefit after getting the home possession. That is, your total interest component (Current Year post-possession interest component + Previous year's 20% pre-EMI interest component) cannot exceed 1.5 Lakhs limit.
Hence, in the example above, since post-possession, your Interest part is 180,000 and 20% of your pre-EMI interest part is 36,000 taking the total to 216,000. You can still only claim for a maximum of 1.5 Lakhs only for interest.
If you have any questions/queries regarding home loans or HRA claims, the FT Times team will be happy to address them. Please post your questions in the comments section by clicking on the link "Post a Comment" at the end of this page
Joint Home Loan Tax Benefits
Scenario 6: Joint Home LoanScenario 3: Home Loan taken and Possession of home received. But currently NOT staying in the loaned Home: This might happen in case you purchase a home on loan, get the possession, but then due to say work related requirements you shift to another city.
Hence, you can leave your home vacant or put it on rent.
The conditions in scenario 1 applies.
But please note in case you put the house on rent, you are earning rent from it. That rent should be added to your taxable income, apart from the tax benefits you will get from home loan as mentioned in scenario 1 or scenario 2.
Scenario 4: Can I claim both Home Loan Tax benefit and HRA (House Rent Allowance)?
YES. That is possible. Many individuals believe that they cannot claim HRA and Home Loan Tax benefits at the same time, even many corporate office's finance and payroll department do not accept such claims from the employees, but as per the IT rules, it is very much possible to claim both HRA and Home Loan Tax Benefit. However, again there are multiple scenarios depending upon which one can and cannot claim both HRA and Home Loan Benefit.
To explain that scenario, we encourage you to check our dedicated article HRA & Home Loan Tax Benefit can be Claimed Together
But before taking a decision on Home Loans, do check the benefits of going for a Joint Home Loan, where your tax savings can be multi-folds, depending upon the no. of applicants. Although there are some disadvantages also, see the next article on Joint Home Loan Tax Benefits
Friday, 3 June 2011
Joint Home Loan Tax Benefits
Continuing our series on home loan articles, in this article we discuss the case of Tax Benefits on Joint Home Loans. You can have a look at the other Home loan Tax Benefits Scenarios at All Home Loan Articles where we discuss various scenarios on eligibility for home loan tax benefits.
Scenario 5: Home Loan Taken, Possession received but given the house on rent:
You are eligible for home loan tax benefit for both your principle repayment and interest repayment.
You can also be eligble for getting HRA tax benefit. Check the link for details : HRA & Home Loan Tax Benefit can be Claimed Together
If you have any questions/queries regarding home loans or HRA claims, the FT Times team will be happy to address them. Please post your questions in the comments section by clicking on the link "Post a Comment" at the end of this page
The case of Joint home loan with your partner or other family member is the most beneficial one. Why? Because both (or all) the joint home loan applicants can claim for tax benefit on both the interest payment under section 24(b) and principal repayment under section 80C.
Assume the following case where you and your partner went for a joint home loan (with 50:50 share), and over a financial year you both individually repayed 80,000 each for principle repayment and 180,000 each for interest repayment.
So together you both paid 160,000 as principle repayment and 3.6 lakhs as interest repayment.
Had it been a single person home loan, he would have claimed only a max of 1 Lakh for principle repayment and 1.5 Lakhs for interest repayment. But in this case being a joint home loan account between two people, both can claim for 80,000 as principle repayment and 1.5 lakh each as interest repayment. Hence, jointly you both can double your tax benefit in case of a joint loan.
However, you must be a bit careful with the joint applications.
The reasons are that joint loan applications are scrutinized deeply by the home loan offering bank and are liable to get rejected on many basis. For e.g., a sister-brother jointly applied for home loan but that might get rejected because the home loan bank might raise objections citing problems in future leading to "rights on property" between the sister and brother. Similar case can occur between 2 brothers, cousins, etc.
The best combination for a joint home loan is husband and wife, as they are supposed to live together and usually the chances of disputes are less.
However, please remember that even if you take a joint home loan with your spouse, it locks both of you till you repay the entire loan.
Take this case. A couple - husband IT engineer and wife doctor - applies for joint home loan. Since doctor wife was not working because she has a 1.5 years old kid to look after at the time of loan application, they decide to go with 90:10 share ratio.
The thought was that after 2 years or so, when the kid will start going to school, the doctor wife can start her clinic and then she can claim for the tax benefit on her share of 10%.
But after 2 years, the wife tried getting a business loan to setup her clinic and she was denied. The reason, she already has a joint loan running in her name. She cannot get another one till this one gets cleared.
Although this might vary from bank to bank, but it is a thought which needs to be kept in mind before going for Joint Home Loan applications
Scenario 5: Home Loan Taken, Possession received but given the house on rent:
You are eligible for home loan tax benefit for both your principle repayment and interest repayment.
You can also be eligble for getting HRA tax benefit. Check the link for details : HRA & Home Loan Tax Benefit can be Claimed Together
If you have any questions/queries regarding home loans or HRA claims, the FT Times team will be happy to address them. Please post your questions in the comments section by clicking on the link "Post a Comment" at the end of this page
Joint Home Loan Tax Benefits
Scenario 6: Joint Home LoanThe case of Joint home loan with your partner or other family member is the most beneficial one. Why? Because both (or all) the joint home loan applicants can claim for tax benefit on both the interest payment under section 24(b) and principal repayment under section 80C.
Assume the following case where you and your partner went for a joint home loan (with 50:50 share), and over a financial year you both individually repayed 80,000 each for principle repayment and 180,000 each for interest repayment.
So together you both paid 160,000 as principle repayment and 3.6 lakhs as interest repayment.
Had it been a single person home loan, he would have claimed only a max of 1 Lakh for principle repayment and 1.5 Lakhs for interest repayment. But in this case being a joint home loan account between two people, both can claim for 80,000 as principle repayment and 1.5 lakh each as interest repayment. Hence, jointly you both can double your tax benefit in case of a joint loan.
However, you must be a bit careful with the joint applications.
The reasons are that joint loan applications are scrutinized deeply by the home loan offering bank and are liable to get rejected on many basis. For e.g., a sister-brother jointly applied for home loan but that might get rejected because the home loan bank might raise objections citing problems in future leading to "rights on property" between the sister and brother. Similar case can occur between 2 brothers, cousins, etc.
The best combination for a joint home loan is husband and wife, as they are supposed to live together and usually the chances of disputes are less.
However, please remember that even if you take a joint home loan with your spouse, it locks both of you till you repay the entire loan.
Take this case. A couple - husband IT engineer and wife doctor - applies for joint home loan. Since doctor wife was not working because she has a 1.5 years old kid to look after at the time of loan application, they decide to go with 90:10 share ratio.
The thought was that after 2 years or so, when the kid will start going to school, the doctor wife can start her clinic and then she can claim for the tax benefit on her share of 10%.
But after 2 years, the wife tried getting a business loan to setup her clinic and she was denied. The reason, she already has a joint loan running in her name. She cannot get another one till this one gets cleared.
Although this might vary from bank to bank, but it is a thought which needs to be kept in mind before going for Joint Home Loan applications
Thursday, 2 June 2011
HRA & Home Loan Tax Benefit can be Claimed Together
Details about how to claim HRA & Home Loan Tax Benefit together
Many individuals feel that if they have a Home Loan for which they are paying an EMI but not residing in that home, and staying in a rented apartment, then they cannot claim for both the tax benefits of HRA and Home Loan repayment. However, this is NOT true. The Income tax rules allow you to claim both HRA (House Rent Allowance) Tax benefit and Home Loan Repayment Tax benefit together, based upon certain conditions. Let's see the details of it in this article.
However, majority of the flats being sold are under-construction flats. That leads to a problem - unless the flat is ready to move in, the loan borrower has to continue his stay in a rented apartment, while he still has to pay EMI for his home loan on the under-construction flat. That leads to a situation where one ends up paying both EMI (or pre-EMI) for his home loan as well as House Rent.
Take the second case - you bought a flat in Mumbai on home loan, but after that you move to Bangalore as you got a better high paying job there. So, your EMI is going on for your Mumbai based Flat, while you are paying rent in Bangaloe for your Bangalore based flat. Again, the situation is where you are paying both EMI on Home loan and rent for your rented flat.
If you have any questions/queries regarding home loans or HRA claims, the FT Times team will be happy to address them. Please post your questions in the comments section by clicking on the link "Post a Comment" at the end of this page
Here, we discuss the possible scenarios where you are eligible for claiming tax benefit on home loan and HRA (House Rent Allowance):
Scenario 1: You buy a house by taking Home Loan, get the possession and are currently staying in that house:
Since you are staying in your own purchased house, you can NOT claim for House Rent Allowance.
Please remember that HRA can be claimed only if you (as a tax payee), are staying in a rented home.
In this case, since you are not staying in a rented house, you cannot claim for HRA.
However, you can surely claim for Home Loan Tax benefits.
Scenario 2: House purchased on Home Loan in one city, Living in another city on rent:
This is the scenario we described above with the example of Home purchased on loan in Mumbai and working and living in Bangalore on rent.
In such a case, you are eligible for both claiming both HRA (House Rent Allowance) Tax benefit as well as the Tax benefit on your home loan repayment.
Scenario 3: Home purchased on Loan but not ready for possession, staying on rent in same city:
This is the most common scenario - you have booked an under-construction property and it will be ready after a few months to few year for you to get possession. Hence, you are currently staying on rent in the same city where you have booked property on home loan.
So there are two phases here:
Phase I - Under-construction & stay on Rent :
You are eligible for HRA claim, but you are NOT elgibile for Home Loan tax benefit. This situation will remain till the date you get the possession of your purchased flat.
Phase II - Purchased Flat possession given, you vacate the rented apartment & move in to your purchased flat:
After you get possession of your purchased flat and you move in there - the situation reverses. Now, you CANNOT claim for HRA, but you can now claim for Home Loan Tax benefits (both principle and interest repayment of home loan).
Also, whatever EMI (or pre-EMI) you paid during the Phase I, you can claim 1/5th or 20% of that in a period of 5 years starting from the year you got possession - See this article for details
Scenario 4: Purchased Home possession received, but not suitable for staying. You take another rented flat in same city:
This is the when you purchase home on loan which is on the eastern end of the city and get the possession of house.
Your EMI is going on. Suddenly, your employer shifts his office to western end of the city making it impossible for you to travel such a long distance daily. Hence, you vacate your self-possessed home on loan, an take another one on rent which is near to your office.
Now, we are not aware of any hard and fast rules on this case, because the reason for such a case has to be genuine. We dont know if there is any specific distance prescribed in the IT rules for claiming it to be a genuine reason for getting into such a situation.
However, you are eligible for claiming both the HRA and Home loan tax benefit in such a case. It is possible that the Finance and Payroll department may deny your claim, but you must check with a qualified tax expert about your case and file for a tax benefit refund if your case is genuine and not accepted by your employer.
If you have any questions/queries regarding home loans or HRA claims, the FT Times team will be happy to address them. Please post your questions in the comments section by clicking on the link "Post a Comment" at the end of this page
Scenario 5: You have a possession ready home on home loan, but you put it on rent and stay in another rented apartment
This scenario can occur as an extension of Scenario 4 where you put your owned house on rent as you move to other part of the city.
It can also occur when all of a sudden rental rates in the locality of your area have increased, say to 20K and you can get a cheaper rented flat near your office for just 8K rent. So, you put your purchased house on rent for 20K and take another home at 8K rent, reaping the benefit of 12K plus the proximity to your office.
In this case also, you should be eligible for both HRA tax benefit as well as Home Loan Tax benefit on both principle as well as interest payment. Employer might deny it, but again check with a tax expert.
However, you must note that the income you are getting from putting your house on rent is taxable. So make sure to pay taxes on that income
Many individuals feel that if they have a Home Loan for which they are paying an EMI but not residing in that home, and staying in a rented apartment, then they cannot claim for both the tax benefits of HRA and Home Loan repayment. However, this is NOT true. The Income tax rules allow you to claim both HRA (House Rent Allowance) Tax benefit and Home Loan Repayment Tax benefit together, based upon certain conditions. Let's see the details of it in this article.
Claim Both HRA & Home Loan Tax Benefits Together
Majority of the people who take home loan belong to the service class. Among them also, the majority are those who migrate from their native town to usually a large metro city for employment reasons. Now the struggle begins - take a home on rent, if real estate rates permit affordability and home loan is available, book a flat to be purchased.However, majority of the flats being sold are under-construction flats. That leads to a problem - unless the flat is ready to move in, the loan borrower has to continue his stay in a rented apartment, while he still has to pay EMI for his home loan on the under-construction flat. That leads to a situation where one ends up paying both EMI (or pre-EMI) for his home loan as well as House Rent.
Take the second case - you bought a flat in Mumbai on home loan, but after that you move to Bangalore as you got a better high paying job there. So, your EMI is going on for your Mumbai based Flat, while you are paying rent in Bangaloe for your Bangalore based flat. Again, the situation is where you are paying both EMI on Home loan and rent for your rented flat.
If you have any questions/queries regarding home loans or HRA claims, the FT Times team will be happy to address them. Please post your questions in the comments section by clicking on the link "Post a Comment" at the end of this page
Here, we discuss the possible scenarios where you are eligible for claiming tax benefit on home loan and HRA (House Rent Allowance):
Scenario 1: You buy a house by taking Home Loan, get the possession and are currently staying in that house:
Since you are staying in your own purchased house, you can NOT claim for House Rent Allowance.
Please remember that HRA can be claimed only if you (as a tax payee), are staying in a rented home.
In this case, since you are not staying in a rented house, you cannot claim for HRA.
However, you can surely claim for Home Loan Tax benefits.
Scenario 2: House purchased on Home Loan in one city, Living in another city on rent:
This is the scenario we described above with the example of Home purchased on loan in Mumbai and working and living in Bangalore on rent.
In such a case, you are eligible for both claiming both HRA (House Rent Allowance) Tax benefit as well as the Tax benefit on your home loan repayment.
Scenario 3: Home purchased on Loan but not ready for possession, staying on rent in same city:
This is the most common scenario - you have booked an under-construction property and it will be ready after a few months to few year for you to get possession. Hence, you are currently staying on rent in the same city where you have booked property on home loan.
So there are two phases here:
Phase I - Under-construction & stay on Rent :
You are eligible for HRA claim, but you are NOT elgibile for Home Loan tax benefit. This situation will remain till the date you get the possession of your purchased flat.
Phase II - Purchased Flat possession given, you vacate the rented apartment & move in to your purchased flat:
After you get possession of your purchased flat and you move in there - the situation reverses. Now, you CANNOT claim for HRA, but you can now claim for Home Loan Tax benefits (both principle and interest repayment of home loan).
Also, whatever EMI (or pre-EMI) you paid during the Phase I, you can claim 1/5th or 20% of that in a period of 5 years starting from the year you got possession - See this article for details
Scenario 4: Purchased Home possession received, but not suitable for staying. You take another rented flat in same city:
This is the when you purchase home on loan which is on the eastern end of the city and get the possession of house.
Your EMI is going on. Suddenly, your employer shifts his office to western end of the city making it impossible for you to travel such a long distance daily. Hence, you vacate your self-possessed home on loan, an take another one on rent which is near to your office.
Now, we are not aware of any hard and fast rules on this case, because the reason for such a case has to be genuine. We dont know if there is any specific distance prescribed in the IT rules for claiming it to be a genuine reason for getting into such a situation.
However, you are eligible for claiming both the HRA and Home loan tax benefit in such a case. It is possible that the Finance and Payroll department may deny your claim, but you must check with a qualified tax expert about your case and file for a tax benefit refund if your case is genuine and not accepted by your employer.
If you have any questions/queries regarding home loans or HRA claims, the FT Times team will be happy to address them. Please post your questions in the comments section by clicking on the link "Post a Comment" at the end of this page
Scenario 5: You have a possession ready home on home loan, but you put it on rent and stay in another rented apartment
This scenario can occur as an extension of Scenario 4 where you put your owned house on rent as you move to other part of the city.
It can also occur when all of a sudden rental rates in the locality of your area have increased, say to 20K and you can get a cheaper rented flat near your office for just 8K rent. So, you put your purchased house on rent for 20K and take another home at 8K rent, reaping the benefit of 12K plus the proximity to your office.
In this case also, you should be eligible for both HRA tax benefit as well as Home Loan Tax benefit on both principle as well as interest payment. Employer might deny it, but again check with a tax expert.
However, you must note that the income you are getting from putting your house on rent is taxable. So make sure to pay taxes on that income
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