Home Loan Basics ( How to save on home loan and Taxes )

[Vasuki]

Disclaimer - I have complied information and wrote this . Take your CA words for tax & do your own research for more
You can edit if u see anything wrong..
Sorry for grammatical mistakes.




Loan calculator for reference:-

Let's cut short and here is how u can save directly or indirectly after getting the home loan :-
1- Payment of 2-3 extra emi in a year ,when u can afford or get Bonus
2- FLOATING RATE LOANS
when your intrest rate is changed ( yes bank can do it without informing) you need to restructure the loan and increase emi amount by few thousand.
IF repo rate has decreased you can visit bank and get your interest changed to lower % and restructure the loan .
3- prepayment of lakhs or chunk amount in a go ( these directly go to your principal amount by 100% )
Little illustration - suppose if you have

30 lakh loan for 8% at 20 year and your emi is 25093 rs .
You paid 14 emi .
And total intrest payable is 3022368 (30lakh 22 thousand ...)
IF you Pay 1 lakh extra .at 14th month emi ur intrest will reduce by wooping 3 lakh + and now u will only pay 26 lakh in intrest.

why this happened:- it's because you saved 19 year of intrest by paying 1 lakh directly to Principal amount.


Another illustration for point 1 -
Let's suppose you are having struggle and can only save 1 extra Emi per year .
So extra 25k in a year
So now I'm every year 12th month
We will pre pay 25k extra
Now your total 30 lakh intrest comes down to 24 lakh 80 thousand.
You saved 4.4+ lakh in intrest just wait one extra emi pre payment .
What's
More intresting is if u do one extra emi you will complete your 240 month emi home loan in just 204 month.
So u just saved 3 year and 4+ lakh


Illustration 3- if u pay 2 extra emi

You will save wooping 9 lakh and 20 year loan will end in 15 years

But this logic has a flaw - if you pre pay in 1st half of your home loan tenure then u will save more because in first few months & year of any loan
In emi most chunk goes to intrest more and principal less .

Let's see this with example .
If you pre pay 1 lakh in 200th month of 240 month emi
U will just saved 30 k in intrest.

SOONER THE PRE PAYMENT, GREATER THE IMPACT

iN Fixed intrest rate loan - there is penalty on pre payment
but on floating intrest rate there is no penalty on pre payment.


Now we come to 2nd part how to save on tax with home loan
we all know 80c And it's 1.5 lakh benefits

we can claim deduction of principal amount paid in home loan in year

even stamp duty while purchasing home can be claimed under this

BUt let's not get fizzy

you can claim deduction with section 24
on intrest you pay on home loan upto 2 lakh .

Illustration again
Since in first few year u will be paying lot in intrest then u can save 2 lakh claim in section 24 easily

If you have joint owner . Both can claim deduction seperately. Total
3.5+3.5 on taxable income

Some Rbi rules

1- bank will inform you regarding change in intrest rate
2- bank while changing intrest rate should give you options to change from floating intrest rate to fixed interest rate


LETS SAY YOUR INTREST RATE INCREASED .
BANK WILL GIVE TWO CHOICE
1- PAY SAME EMI AND INCREASE TENURE
2- PAY MORE EMI AND SAME TENURE
3 - COMBINATION OF BOTH



Note by @RAMESH BABU N

avoid SIPs of MFs - which give practically spreaking - lesser benefits than what you could save if you pre-pay HL. Or, investing in shares/bonds also need to be reconsidered.

REMEMBER - every pre-prepayment - however small it might be - saves a lot of money in the long run

NOTE:-
Edits will COME WHEN I HAVE TIME TIME



Thanks to @iAmPm

 

[Hemang]

Yes,
Yes.
Same for my parents, Me,Father & Mother co owners and co borrowers.
but the total interest amount is ~4L hence only 2 people can take benefit, right?

1/3rd kar lo home loan tax interest fir. But check for every person how much you are savings on tax outgo, then decide bhai.

 

[financetherapy]

1/3rd kar lo home loan tax interest fir. But check for every person how much you are savings on tax outgo, then decide bhai.

Thank you bhai! That is main ki overall kitna paisa bach raha hai.
I never knew ki aisa ho sakta hai. Thanks to technofino community. Plus along with loans knowledge Ive become and decent CC user now with guiding a few friends and family how to get the best out of their cc without manufacturing spends.

 

[Hemang]

Thank you bhai! That is main ki overall kitna paisa bach raha hai.
I never knew ki aisa ho sakta hai. Thanks to technofino community. Plus along with loans knowledge Ive become and decent CC user now with guiding a few friends and family how to get the best out of their cc without manufacturing spends.

yes bhai. we should help each other and share the knowledge. Where is the fun when you cannot share it with everyone. We all feel the joy when someone says points aa gaye, discount mil gaya, problem solve ho gayi.

 

[Zacobite]

Hi folks need some advice.

1. Which bank(s) would be good to take HL? PSUs or Private banks. Which ones offer the least interest rate?

2. Should I become a joint owner in the loan with my fatheror should I plan to save taxes using HRA/rent way? If I become a joint owner initially is there any chance to use rent way to save taxes later.

My CIBIL: 770+ (only CCs)
Other person's CIBIL: 740+ (car loan, some commercial loan history, all paid)

psu will be lower interest rate but lower disbursement also of overall cost.. i recommend kotak.. aggressive / negotiation can be done.. smooth process.. icici is also close.. hdfc is great but v cumbersome and finicky

 

[shivamk]

psu will be lower interest rate but lower disbursement also of overall cost.. i recommend kotak.. aggressive / negotiation can be done.. smooth process.. icici is also close.. hdfc is great but v cumbersome and finicky

Thanks, will checkout kotak and icici

 

[sjmajumder]

Note by @RAMESH BABU N

avoid SIPs of MFs - which give practically spreaking - lesser benefits than what you could save if you pre-pay HL. Or, investing in shares/bonds also need to be reconsidered.

Totally disagree.

Direct calculation --> As long as you can maintain an XIRR > HL ROI you are gaining
Tax implication --> On MF SIP you are paying tax of 12.5% (assuming you stay invested for at least a year, 20% if less than a year). So you need to deduct this and then calculate XIRR (bit complicated )

These days, in most top MFs you get a CAGR of around 30% or more whereas you pay only 8-10% for HL. The only issue is there is a risk factor as returns from MFs are not guaranteed. Depending on your risk apetite decide where you want to put that extra money

 

[Vasuki]

Totally disagree.

Direct calculation --> As long as you can maintain an XIRR > HL ROI you are gaining
Tax implication --> On MF SIP you are paying tax of 12.5% (assuming you stay invested for at least a year, 20% if less than a year). So you need to deduct this and then calculate XIRR (bit complicated )

These days, in most top MFs you get a CAGR of around 30% or more whereas you pay only 8-10% for HL. The only issue is there is a risk factor as returns from MFs are not guaranteed. Depending on your risk apetite decide where you want to put that extra money

You earn to pay more via MF investment

You pay now more to pay less intrest overall

Why complicate things! As long as it's simple


For other things u can do Mutual fund investments to grow overtime

 

[RAMESH BABU N]

Totally disagree.

One's approach depends on one's attitude and way of life.

I/we always preferred a LOW LOAN policy, despite both of us being Bankers having worked in 2 banks each. We avoided taking many loans - even on subsidized rates - during our 30+ yrs careers. We had acquired all possible creature comforts n luxuries - with staff loans - but paid them at the earliest - despite being soft loans - basically because we are loan averse people. Mostly, due to family upbringings. We are glad that we remained so.

We have seen many colleagues n relatives n friends - always neck deep in debts n loans - n leading sleepless nights - more so when they want to do job-shifts or during difficult times (lay offs, career shifts, sabbaticals, growing families, transfers, parental burdens...).

Remember, no two cases are similarly paced.

Decide what suits you best.

 

[Zacobite]

Totally disagree.

Direct calculation --> As long as you can maintain an XIRR > HL ROI you are gaining
Tax implication --> On MF SIP you are paying tax of 12.5% (assuming you stay invested for at least a year, 20% if less than a year). So you need to deduct this and then calculate XIRR (bit complicated )

These days, in most top MFs you get a CAGR of around 30% or more whereas you pay only 8-10% for HL. The only issue is there is a risk factor as returns from MFs are not guaranteed. Depending on your risk apetite decide where you want to put that extra money

not always true.. HL is a special kinda loan.. while the ROI is low the interest is front loaded in the tenure.. so prepayment is better for sure during early part if tenure ( have to calculate as per actual numbers).. so mf or prepay has to be carefully decided on!!

 

[sjmajumder]

not always true.. HL is a special kinda loan.. while the ROI is low the interest is front loaded in the tenure.. so prepayment is better for sure during early part if tenure ( have to calculate as per actual numbers).. so mf or prepay has to be carefully decided on!!

No. You are absolutely wrong. Interest is calculated every month on daily balance for the current month and debited to the account, thereby making it monthly compound interest.

 

[sjmajumder]

One's approach depends on one's attitude and way of life.

I/we always preferred a LOW LOAN policy, despite both of us being Bankers having worked in 2 banks each. We avoided taking many loans - even on subsidized rates - during our 30+ yrs careers. We had acquired all possible creature comforts n luxuries - with staff loans - but paid them at the earliest - despite being soft loans - basically because we are loan averse people. Mostly, due to family upbringings. We are glad that we remained so.

We have seen many colleagues n relatives n friends - always neck deep in debts n loans - n leading sleepless nights - more so when they want to do job-shifts or during difficult times (lay offs, career shifts, sabbaticals, growing families, transfers, parental burdens...).

Remember, no two cases are similarly paced.

Decide what suits you best.

What I gave is purely a financial comparison. I too don't take loans and avoid EMIs (apart from cases where you get extra discount for buying on EMI)

I have taken only 2 loans till date. My 10 year SBI Maxgain HL I prepaid around 1 year in advance but didn't close the account. It had withdrawable balance that I could withdraw anytime if required. I paid zero interest for around last 1 year, since the time outstanding principal became zero.

My second loan was from Canara bank for 7 years for my current car. Had to take loan as I suddenly upgraded my car without any pre planning. I repaid the same in less than 2 years.

I am thankful to God and Pray to God to keep blessing us forever so that we never have to take any loan.

 

[Zacobite]

No. You are absolutely wrong. Interest is calculated every month on daily balance for the current month and debited to the account, thereby making it monthly compound interest.

check repayment schedule and you will know what i mean...interest component is higher..... over and out..

 

[sjmajumder]

check repayment schedule and you will know what i mean.. over and out..

Check account statement and you will understand. Repayment schedule is based on assumption that you will pay only EMI amount that too on the due date. Actual interest is calculated based on actual transactions i.e. actual amount paid and date of payment.

 

[Zacobite]

Check account statement and you will understand. Repayment schedule is based on assumption that you will pay only EMI amount that too on the due date. Actual interest is calculated based on actual transactions i.e. actual amount paid and date of payment.

have said what i had to.. good luck.. these are basics..

https://www.google.com/amp/s/www.livemint.com/money/personal-finance/is-prepaying-your-home-loan-the-best-choice-heres-how-to-decide-loans-emis-interest-rates/amp-11716438736488.html

 

[dravidsarang]

Disclaimer - I have complied information and wrote this . Take your CA words for tax & do your own research for more
You can edit if u see anything wrong..
Sorry for grammatical mistakes.




Loan calculator for reference:-

Let's cut short and here is how u can save directly or indirectly after getting the home loan :-
1- Payment of 2-3 extra emi in a year ,when u can afford or get Bonus
2- FLOATING RATE LOANS
when your intrest rate is changed ( yes bank can do it without informing) you need to restructure the loan and increase emi amount by few thousand.
IF repo rate has decreased you can visit bank and get your interest changed to lower % and restructure the loan .
3- prepayment of lakhs or chunk amount in a go ( these directly go to your principal amount by 100% )
Little illustration - suppose if you have

30 lakh loan for 8% at 20 year and your emi is 25093 rs .
You paid 14 emi .
And total intrest payable is 3022368 (30lakh 22 thousand ...)
IF you Pay 1 lakh extra .at 14th month emi ur intrest will reduce by wooping 3 lakh + and now u will only pay 26 lakh in intrest.

why this happened:- it's because you saved 19 year of intrest by paying 1 lakh directly to Principal amount.


Another illustration for point 1 -
Let's suppose you are having struggle and can only save 1 extra Emi per year .
So extra 25k in a year
So now I'm every year 12th month
We will pre pay 25k extra
Now your total 30 lakh intrest comes down to 24 lakh 80 thousand.
You saved 4.4+ lakh in intrest just wait one extra emi pre payment .
What's
More intresting is if u do one extra emi you will complete your 240 month emi home loan in just 204 month.
So u just saved 3 year and 4+ lakh


Illustration 3- if u pay 2 extra emi

You will save wooping 9 lakh and 20 year loan will end in 15 years

But this logic has a flaw - if you pre pay in 1st half of your home loan tenure then u will save more because in first few months & year of any loan
In emi most chunk goes to intrest more and principal less .

Let's see this with example .
If you pre pay 1 lakh in 200th month of 240 month emi
U will just saved 30 k in intrest.

SOONER THE PRE PAYMENT, GREATER THE IMPACT

iN Fixed intrest rate loan - there is penalty on pre payment
but on floating intrest rate there is no penalty on pre payment.


Now we come to 2nd part how to save on tax with home loan
we all know 80c And it's 1.5 lakh benefits

we can claim deduction of principal amount paid in home loan in year

even stamp duty while purchasing home can be claimed under this

BUt let's not get fizzy

you can claim deduction with section 24
on intrest you pay on home loan upto 2 lakh .

Illustration again
Since in first few year u will be paying lot in intrest then u can save 2 lakh claim in section 24 easily

If you have joint owner . Both can claim deduction seperately. Total
3.5+3.5 on taxable income

Some Rbi rules

1- bank will inform you regarding change in intrest rate
2- bank while changing intrest rate should give you options to change from floating intrest rate to fixed interest rate


LETS SAY YOUR INTREST RATE INCREASED .
BANK WILL GIVE TWO CHOICE
1- PAY SAME EMI AND INCREASE TENURE
2- PAY MORE EMI AND SAME TENURE
3 - COMBINATION OF BOTH



Note by @RAMESH BABU N

avoid SIPs of MFs - which give practically spreaking - lesser benefits than what you could save if you pre-pay HL. Or, investing in shares/bonds also need to be reconsidered.

REMEMBER - every pre-prepayment - however small it might be - saves a lot of money in the long run

NOTE:-
Edits will COME WHEN I HAVE TIME TIME



Thanks to @iAmPm

This is very well written. I somehow missed to read this thread earlier.
Good job with multiple illustrations as well.

Few points I would like to add:

1. If you have multiple loans from bank (in my case I have a Car Loan apart from HL): Always push your bonus and extra money first to close car loans (or any liability loans). Specially, if you are using HL in terms of Tax Savings.
2. People who have good amounts in SB or have high monthly income, must definitely consider SBI MaxGain HL. (I heard BOB also have a similar product). This allows you to control your interest payable (when you have surplus funds) according to your need - For example, I kind of control my annual interest amount in a way that it gives me maximum tax savings benefits for ITR filing. Google/Youtube can give good examples or I may write one in future as time permits.

 

[Zacobite]

Thanks sir. One question I recently paid 2L prepayment for my home loan.
There are 2 options
1. Reduce tenure keeping emi same
2. Reduce emi keeping tenure same.

Is there much difference, I choose 1st option to reduce tenure to clear load faster.

always reduce tenure if u can afford the emi

 

[sjmajumder]

have said what i had to.. good luck.. these are basics..

https://www.google.com/amp/s/www.livemint.com/money/personal-finance/is-prepaying-your-home-loan-the-best-choice-heres-how-to-decide-loans-emis-interest-rates/amp-11716438736488.html

Exactly... Basics. Check any home loan account statement. Not repayment schedule.

 

[Zacobite]

Exactly... Basics. Check any home loan account statement. Not repayment schedule.

.. not saying anything more..

 

[shivamk]

I kind of control my annual interest amount in a way that it gives me maximum tax savings benefits for ITR filing

@Vasuki might be point worth adding in original post. "If you are using an Max Gain loan, you can also adjust the amount to be deposited in the OD account attached to the loan so as to maximize tax benefits"

I may write one in future as time permits.

That would be great.

 

[Zacobite]

@Vasuki might be point worth adding in original post. "If you are using an Max Gain loan, you can also adjust the amount to be deposited in the SB account attached to the loan so as to maximize tax benefits"


That would be great.

yes if u have max gain tgen that account shd be your main account for all day to day transactions... except for investment etc.. max benefits will accrue that way