It is everybody’s dream to have their own home. To fulfill this dream, home loan is a tool which will be handy in making your dream into reality. But before taking loan it is better if you have some knowledge about the meanings of EMI, Pre-EMI and Pre-Construction Period. Let us have look into each of them in detail.
1) EMI-EMI stands for Equated Monthly Installment. Suppose you took loan for Rs.50,00,000 and tenure being 20 years with interest rate 11%. Then your EMI will be Rs.51,609. But in allmost all cases you will not need whole loan amount immediately as construction will take 2 to 3 years. During this period you need partial amounts of your total loan amount throughout this construction period. In that case in EMI type of loans, without bothering about the construction period, you continue to pay the principal and interest. This option holds good to reduce your future loan commitment as you start immediate re-payment which includes Princiapl+Interest. But you will not get the tax benefit until your Pre-Construction period is over.
2) Pre-EMI-It is the monthly interest payment what you need to pay on the amount you withdrawn from the loan amount during construction period. Remember in such type of re-payments, you are paying only interest part and Principal part will start after the full disbursement of loan amount. To make it clear, let us have a example.
Suppose Mr.X took loan for Rs.50,00,000 for the tenure of 20 years and interest rate being 11%. But he dont want the whole Rs.50,00,000 immediately. Instead he want to withdraw the loan amount in part depending on his construction needs. In that case suppose he took Rs.10,00,000 today and next installments after completion of each 6 months. Then interest EMI he need to pay is as below.
A) First withdrawal-Loan Amount Rs.10,00,000 Interest-11% then you need to pay Rs.9,166 as EMI. But this payment consists of only interest part not principal.
B) Second Withdrawal-Loan Amount Rs.10,00,000 Interest-11% then you again need to pay Rs.9,166 as EMI. So after 6 months of your first withdrawal you are paying Rs. 18,332 (Rs.9,166+Rs.9,166) as EMI towards interest from both the withdrawals you made.
Like that for each partial withdrawal from loan amount you start to pay only interest part till your loan amount fully disbursed. But here also you will not get any tax benefit till the Pre-Construction period is over. This looks pretty good when you compare with first option of repayment (EMI), where you start to pay Principal+Interest from the immediate next month of your loan disbursement. Pre-EMI option holds good for people who are currently having more personal financial commitments and are of the opinion that at the stage of completion of Pre-Construction period their income may raise and they are in a better position to pay EMI (Principal+Interest). Reverse may also happen, as the time passes you may build up more financial commitments. Hence it is better to analyze and decide yourself.
3) Pre-Construction Period-It is the period commencing from on the date of borrowing and ending on a) March 31st of immediately prior to the date of completion of construction/date of acquisition or b) date of repayment of loan, whichever is earlier.
To have more clarity, let us have example. Suppose Mr.X took the loan on June 10, 2005 and the construction of the house completed on January 2011. Date of repyament of loan is a) January 16, 2016, or b) June 30, 2012, or c) October 31, 2008
Suppose loan repayment is January 16, 2016 or June 30, 2012, then pre-construction period ends on March 31, 2010 (being March 31, 2010 immediately prior to the date of completion of construction/acquisition).
Suppose loan repayment is October 31, 2008 then pre-construction period ends on October 31, 2008 (being March 31st, immediately prior to completion of construction date of repayment of loan, whichever is earlier).
During this period whatever you pay as interest and principal will totally added and claim for tax deduction in five equal annual installments, commencing from the year of completion of house.
Hope I elaborated meanings in a better way.