Home Loan

Home loans: A guide to claiming tax benefits

To alleviate the burden of a home loan, the government offers several tax concessions to borrowers. While most people may be broadly aware of home loan tax benefits, there are several other nuances that need to be highlighted.

Principal repaid on home loan

The principal amount repaid on the home loan taken can be deducted from your income up to Rs 1.5 lakhs under Section 80C. This deduction, however, comes with a couple of caveats. You can only avail of this deduction after construction of your house is complete and possession is received, and not while construction is underway. “When your developer delays the possession of your apartment, this is one more way in which he hurts your interests,” points out Rajendra Kumar Chauhan, a Delhi-based chartered accountant.   

Secondly, speculators should know that you can’t avail of this deduction on principal repayment, if you sell the house within five years of taking possession. If you do, you will have to reverse the deduction. This means that all the deduction you have availed of so far, will be treated as income in the year of sale and taxed entirely.

 Interest repaid

Tax saving is also available on interest repaid on a Home Loans in India. However, the deduction is different for a self-occupied property than for a house that you intend to rent out.

Self-occupied: If you have taken a home loan to buy a house that you intend to live in, the interest paid on this loan is eligible for a deduction up to Rs 2 lakhs under Section 24 of the Income Tax Act. This deduction is also available only after you have received possession of the house. Construction must be completed within three years from the end of the financial year in which the loan was taken. The interest paid while the house is under construction, will continue to accumulate. You can claim deduction on this amount for five years after possession. So, if you paid a total interest of Rs 6 lakhs while the house was under construction, you can avail of a deduction of Rs 1.2 lakhs for the next five years after possession.

In case you don’t receive possession within three years of taking the loan, you can only claim a deduction of Rs 30,000 each year. “If your job is in another city and you don’t live in the house that you bought for self-use, then the house will be treated as self-occupied and you may avail of deduction on interest repaid up to Rs 2 lakhs,” explains Arvind Poddar, a Delhi-based chartered accountant. 

Second property: If you buy a second property from which you intend to earn rental income, the deduction on interest repaid, is even more generous. Here, the entire interest repaid can be claimed as a deduction. In other words, the ceiling of Rs 2 lakh doesn’t apply in this case.

You will however have to show the rent that you earn from this property, as ‘income from housing’. This will be added to your total income. However, you are entitled to deductions on rental income. First, you may deduct all the taxes (such as property tax) that you pay on the house. You can also avail a deduction of another 30% for repairs and maintenance.

There is a catch here which to some may appear illogical. Even if the second house remains vacant, it will be treated as being on rent. You will have to show a notional rental income from it based on market rates, which will be taxable after factoring in the two deductions mentioned above.

Deduction on home loan insurance: If you bought a home loan insurance cover (a single-premium policy) along with the loan, you can avail of deduction on the premium paid under Section 80C.

[Source: https://housing.com/news/home-loans-guide-claiming-tax-benefits/]

Housing Loans

Pros and Cons of Home Loan Prepayment

It is an interesting irony with Home Loans. Till the time a person does not have a home loan, he aspires to take one as soon as possible in order to purchase a home. Once he has taken a home loan, the first priority in his life becomes to repay his home loan even though it may come with a cost of his reduced standard of living. It is a prudent decision to repay a loan if one does not require it. After all why should you pay interest on a loan costing roughly 10% when you have idle funds sitting in your bank account earning just 4% interest?

However there are a group of thinkers who do not believe in the philosophy of repaying back their home loans. Let’s discuss the pros and cons of repaying a home loan and I will leave it to the readers to decide which the best option suitable for them is.

1. Reduction of Interest Payouts – The most obvious benefit out of prepayment is that your interest payout reduces. Prepayment of home loan results in an immediate reduction of the outstanding principal on the home loan which results in less Housing Loan Interest Rates being accrued on the loan account. For example, if you have an outstanding loan of Rs. 10 lacs at 10% interest, you would be annually paying approx. Rs. 1 lac interest. If you prepay the loan by Rs. 1lac, 

your interest would reduce from Rs. 1 lac to Rs. 90K per year – approx 10 K saving per year for the duration of the loan.

2. Prepay – without reducing the tenure – Generally when you are going to prepay your home loan, you have two options. Either you can reduce the number of home loan installments or keep the number of installments same but reduce the monthly mortgage payments (EMIs). For example, if you prepay your home loan by Rs. 100,000, you may be provided two options:

a) Instead of paying your monthly EMI (e.g. Rs. 10K per month ) for original tenure of 120 months, reduce the tenure of the same monthly EMI of Rs. 10K to 110 months (illustrative) OR

3. Impact on Leverage

This is an interesting topic and in order to understand it let me take an example. John has an investment opportunity which requires Rs. 1 lac investment and it would provide him annually 15% return. His annual return in this case is Rs. 15,000.

Now let’s bring in another situation, say John has just Rs. 20K in his pocket and he still has the same investment opportunity. John goes to a bank and takes a loan of Rs. 80K at 10% interest.

[Source: http://insight.banyanfa.com/home-loan-prepayment/#]

Housing Loan – 5 Weird Reasons to Finalize the Bank or HFC

Housing Loan is a long term commitment. Even if you go by an average tenure of 8 years, still housing loan can impact your finances if your choice is wrong. Let me be very honest and candid on reviews of home loan providers. You will not find consensus good reviews about any of the Housing Loan providers. At the same time, it is a personal experience and depends on a lot of factors. I shared pre home loan review of top 5. Now you must be wondering, how to finalize a housing loan provider. I suggest you go through the “Home Loan” section on this blog. Through various posts, i have shared the points to be considered by potential borrowers. All points are situational in nature and there is NO standard process. You always need to compromise on few points depending on case to case basis.

Based on my experience, i can say that time pressure plays an important role in the selection of housing loan provider. After the token money is paid or sale agreement is signed, the seller gives max 2-3 weeks’ time to the buyer to process housing loan. It is not a sufficient time to take the right decision. Therefore, the borrower is running against the time & may take a hasty decision. In my opinion, the buyer can try to close the deal as soon as possible. On papers, he should insist on at least 45 days to 60 days’ time to process housing loan.

I come across multiple reasons from my readers for availing a Housing Loan from a particular bank or HFC. My personal favourite reason is a reason given by the borrower who availed housing loan from LICHFL. The reason given by him was that since he had LIC Life insurance policy, therefore, he availed loan from LICHFL. It is not his mistake but the salesperson of LICHFL told him that loan is easily approved for borrowers with LIC policy :). Personally, i find some of the reasons very weird or illogical. Though the borrower may be right in his/her approach but personally i feel that every decision should be logical and well thought through. I am listing down five such reasons.

Housing Loan – 5 Weird Reasons to Finalize the Bank or HFC

1. Processing Fees is waived off: In my opinion, this is the biggest marketing gimmick. I always suggest looking at bigger picture. The processing fees are normally 0.5% – 1% of loan amount or Rs 10,000+taxes. Some banks charge Rs 5,000+taxes and balance in other heads. Therefore, including the entire home loan hidden charges total is between 20k to 25k.

As a marketing promotion, the bank will waive off processing fees. Trust me; waiver of processing fees has high perceived value in the mind of a borrower. Let me fix this misconception. Assuming, i am availing housing loan of 50L at 9.55% for 20 years. My EMI will be approx. Rs 46,750. You can do these calculations through EMI Calculator.  Assuming my home loan run for the entire tenure. On a housing loan of 50L, i will pay an interest of whooping Rs 62, 34,396 i.e. 62L. In other words, my interest payout will be more than the loan amount. As i am going to pay 62L interest, therefore, should i bother about the processing of Rs 10,000+ to finalize a home loan provider? The processing fee is not even a fraction of total interest. I should be concerned about more imp factors like markup, base rate, service, historical interest rate movement etc that will impact my interest outflow i.e. 62L.

Last but not least, always remember that there are NO FREE lunches in this world. If the bank has to charge Rs 20k from me then they will definitely charge. Processing fees will be Zero but there will be legal fees of 5k, Login fees of 4k, and valuation fees of 2k and so on. At the end of the day, total will match to 20k. Therefore, processing fees should not be a criterion to finalize the bank or HFC.

2. Balance Transfer in Future: You can term it as either a casual approach or a consoling factor to justify the decision. In many cases, a borrower is aware that he/she is not making the right choice but they always think that they will balance transfer in future. Always remember that balance transfer means cost, time and efforts. As i mentioned that decision is always situational in nature. Therefore, it might be easy for me to comment but only a borrower is in a right position to take a decision. I observed this reason in the case of a leading HFC that charges fixed interest for 2 years. After 2 years, the interest rate is between 11.5% – 12%. Though borrower is aware that after 2 years there is no choice but to balance transfers but due to current compulsions, they select particular HFC. A balance transfer in future is the highly illogical reason for the current decision.

3. Convenience: It is one of the imp considerations. Borrowers prefer the least documentation. Therefore, borrowers prefer housing loan from a bank or HFC that has pre-approved the project. In a recent case of one of the clients, the project was approved by the SBI but housing loan from PNBHFL was rejected. Quite surprising. When the client checked the reason, he came to know that builder interchanged few blocks with common area/children’s park as per approved plan. SBI was not aware of the same as the project was approved 2 years back. Always remember, a convenience at this stage may cost heavily in future. Therefore, if you are looking for a convenience factor and least documentation then it is better to postpone property purchase decision. The fact of the matter is that it is quite a hassle to buy property and avail housing loan.

4. Seller Recommendation: Normally seller prefers that buyer should avail housing loan from the same bank from which the seller availed or has a running housing loan. The housing loan is processed fast in this case. Seller has a selfish motive behind the same. It has its own pitfalls like the buyer will never get to see the original documents. In a similar case, i observed that banks lost two original documents. Now the person B who bought from person A had a loan from the same bank as person A. He was not able to prove at what stage the original documents were lost by the bank. Therefore, it is important to check all the original documents at the time of purchase. Personally, i will not suggest this arrangement.

5. No other option: Last but not the least, as i always highlight that you should buy in a project approved by at least couple of leading banks and HFC’s. Most of the projects on outskirts of the city or on panchayat land are approved by only one or two Loan for Home provider mostly a very small player. Trust me, no other bank or HFC is willing to lend in such cases. It is always advisable to avail housing loan from one of the top lenders. If they are not willing to lend then it’s a red flag that something is wrong. In such cases, you can altogether drop the idea of buying a property that particular project.

Source: http://www.nitinbhatia.in/home-loan/housing-loan/

Personal Loan Overview

Personal Loans are usually of two types i.e. secured personal loan which is secured against the mortgage of securities, high surrender value insurance policies, gold, etc. and another is unsecured personal loan which does not require you to mortgage anything.

Unsecured personal loans do not require you to provide any collateral security, though some PSU banks may insist on a third party guarantee. Unsecured personal loan can be taken to finance any short-term requirement like oversea trips, marriage, medical emergencies, etc. The only condition is that the persona loan should not be used for speculative purposes.

Personal loan is a simple hassle free process of funding your personal requirement with minimal documentation and within quick time. In India, Banks as well as Non-Banking Financial Corporation (NBFC) finance personal loan.

Purpose of Personal Loan

Personal Loan is commonly known as all-purpose loan it can be uses for fulfilling various legitimate personal needs that includes:-

Higher education for self, children, etc.

Marriage in the family

Dream vacation

Festival expenses

Medical emergencies

Furnishing or renovation of house

Purchase of high end consumer goods

Purchasing of high end lifestyle products

Etc.

Personal Loan Eligibility

Being unsecured in nature, lenders have stricter norms regarding eligibility and sanctioning of personal loan. But some of the basic eligibility criteria the applicant must fulfill are:

Should be a Resident Indian

Should be minimum 21 years of age

Should be Salaried or Self Employed Professional / Non professional

Should be a permanent employee of the organization, if salaried

Should have continuous source of income to service the loan

Rate of Interest and Loan Amount

The rate of interest is primarily dependent on:-

Company for which the prospective borrower is working

Credit history of the borrower.

The bank may reject the personal loan if the borrower has defaulted on his past dues on any credit card or loans.

The maximum loan amount is dependent on prospective borrower’s income and his ability to service the Home Loan Rates and can go up as high as Rs. 30 lakhs. The final loan amount is dependent on host of other factors like regular fixed expenses, existing loan repayment, etc.

Emi and Repayment

Most lenders will require borrower to repay the loan within a period of 12 to 60 months maximum. The borrower can repay the loan by paying regular monthly installments also known as Emi or Equated Monthly installments.

Fees and Charges

Processing fees varies from lender to lender and will be in the range of 0.5% to 3% (excl. service tax) of loan amount. Generally the processing fee for personal loan is not taken upfront, but is deducted from the loan amount disbursed by the lender.

If the personal loan is availed on floating rate of interest the borrower need not pay penalty for early closure of loan but may end up paying penalty if the loan is on fixed rate of interest.

Documents Checklist for Personal Loan

To start the loan process, the lender will require:-

Application Form with photograph

KYC Documents –

Proof of Identity – PAN / Passport / Driver’s License / Voter ID card / Aadhaar card, etc.) and

Proof of Address – Passport / Aadhaar card / Landline Telephone Bill / Electricity Bill, Ration Card, etc.)

A/c. Statement –

Statement of bank account for the last six months

If any previous loan, then Loan A/c. Statement for last 1 year

Income Documents

[Source: http://www.apnapaisa.com/personal-loan-overview/]

Home Loan Jargons

Availing a home loan…. It can be a head spinning affair for those involved! Deciphering the terms and the jargons involved, well, one can just go dizzy!

This article is an attempt to throw light on the complex terms that are involved in the home loaning process. Go one by one and get it all clear:

EMI: In other words, it is the Equated Monthly Installment till you pay back your loan. It is calculated on your interest and principal rates.

Fixed Rate of Interest: This means that the interest rate will remain unchanged or stable throughout the loaning period.

Floating Rate of Interest: In this, the interest rate changes with the market lending rates. Opting for this means that you might have to pay more when the lending rates go up in the market.

Monthly Reducing Balance: Meaning, your interest rate drops with your repayment of principal amount of Home Loans.

Annual Reducing Balance: Here, the principal reduction is done at the end of the year. So, you will be paying interest even for the principal amount which you have paid back.

Processing Charge: It is a payable fee for the loan lending institution when you apply for a home loan.

Prepayment Penalties: This is a charge initiated by the bank/financial institutions when you pay back the loan before the term period mentioned in the agreement, ie, a penalty for prepayment.

Commitment Fee: When you do not avail the loan within a stipulated period, after it being sanctioned and processed, then some banks/ institutions charge you with a commitment fee.

Miscellaneous Cost: These are the other charges like documentation or consultation fees that you may have to pay some lenders. Was it helpful?? Want clarity on more home loan terms? Write back to us @ ask.indiaproperty.com. Our experts are waiting to answer your queries! Ask Now….!

[Source: http://blog.indiaproperty.com/home-loan-jargons/]