I have 21 lakh home loan and my yearly interest amount is around 200000. I take tax benefit on 2 lakhs interest. I have got some lump sum amount. Should I do partial pre-pay of loan or invest the money in some other funds to earn higher returns.
it is based on Simple maths
If rate of return on your investment > home loan interest rate : Invest
If rate of return on your investment < home loan interest rate : Prepay your loan
If prepayment is to be done then that should be done within the first 4-6 years of loan tenure, after that there is no great saving in doing lump-some.
Sometimes it surely is better to invest rather than repaying the loan. But we should also remember that giving income tax to the govt is better than giving interest to Bank and saving a max of 30% of the interest paid. Proper calculations have to be done individually before concluding upon a strategy.
Never hold the home loan just because you are getting tax benefit. To save Rs.60,000 (assuming you are in 30% tax slab), you are DONATING the bank of Rs.1,40,000. Assume that you pay the Rs.60,000 tax and that Rs.1,40,000 will be in your pocket right? How can it is a TAX SAVING? For the sake of saving Rs.60,000 you are giving away your OWN money to bank for the tune of Rs.1,40,000.
Regarding prepayment of home loan, if the loan is less than 5-6 years old, then better to prepay it. If the loan tenure is already cross more than half way mark, then there is no point in prepaying. Also, prepay the loan if your other mandatory goals like kids education or retirements are going smoothly with proper investment. Otherwise, try to fund towards those mandatory goals at first.
Thank you so much for your advice!
Can you please explain how you arrived at Rs. 1,40,000 ?
My scenario is similar.
- I took SBI MaxGain exactly one year ago and my tenure is 10 yrs.
- Currently in Pre-EMI as construction in progress. Full EMI expected to start in June 2020.
- The bank has disbursed around 75% of the the total loan amount.
- Because of a sale of another property I have, I have a lumpsum of the total 75% that the bank has disbursed till now.
I am in the 30% tax bracket. I am thinking whether to park the lumpsum I have in the MaxGain OD account and enjoy zero interest (whatever I pay going forward will go to the principal at least till next disbursements) or take income tax benefit from next year.
I really would be interested to know how you arrived at Rs. 1,40,000 amount to be paid to the bank for a 21 lakh loan amount. Thanks !
The maximum interest benefit on home loan is Rs.2 lakh. Assume that you are in 30% tax bracket and in that case to save Rs.60,000 tax, you are donating Rs.1,40,000 to bank in the form of interest (Rs.2 lakh-Rs.60,000).
Now parking in SBI MaxGain, many people feel that they ENJOY the zero percent EMI and can save it. However, do remember one thing that this interest saving will reduce month on month as in your EMI the interest part will reduce month on month. Hence, never be in a feeling that your earning from parking the money in SBI MaxGain is every month same. Because it is a negative compounding not the positive compounding.
Thank you for the prompt response ! That makes sense. If I avail the home loan interest exemption, it means I am paying Rs. 2 lakh ONLY INTEREST and on that I’m saving Rs. 60,000. So essentially, to save 60,000 I am donating 1,40,000. Nicely put 🙂 !
I have a question on the second part of your answer. Suppose I took a loan of 50 lakhs out of which only 30 lakhs is disbursed. If I put 30 lakhs in my OD, that means effectively I have not taken any loan. So will I still be charged pre-EMI even though there is no outstanding amount ? If yes, then will the pre-EMI I pay be adjusted for future disbursements ? Thanks !