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POSTED BY ON December 9, 2014 6:33 pm COMMENTS (2)
Dear Financial Experts,
I need you advise here
I took a home loan of Rs 20 Lakhs on March, 2012 and I pay EMI of Rs. 20305 for 240 months from IDBI bank @ 10.25%, present outstanding is about Rs. 18.9 Lakhs.
Presently, I am in Germany (works with an IT company) and could save some money which I would want to put in most hassle free profitable deal as I return to India by Feb, 2015.
The big question is should I repay the entire loan amount or invest Rs. 20 lakhs in FD
I cannot invest in market as my job is very demanding, neither have the aptitude for the same.
I do not want to buy another property as these consumes lots of time and energy, which I would want to put in my job as that gives me better monetary return, opportunities and satisfaction.
My present India Salary is ~18 Lakhs per annum and I do not have any other source of income like house rent, agriculture etc.
I am availing income tax deduction of Rs. 1.5 Lakhs on Interest under section 24, however I do not avail any deduction on 80C from the home loan principal as I am already loaded with few LIC pension plans, PPF and monthly PF deductions.
I will not be able to avail section 24 for long as my loan amount is not too high and as time progress interest amount will come down and eventually I will end up availing less than Rs. 1.5 Lakhs.
Please suggest, I still have about 5 months to make a decision as I will repay only next financial year that is 1st April, 2015 as I am claiming the benefit this year and hence will not close out before 31st Mar, 2014 being an honest tax payer.
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Hi Ankit,
When you have to decide between foreclosing a loan or investing in FD, I think you need to consider the stage of the loan – is it in starting stage, is it half way through, or is it approaching its end. Normally, if the loan is in starting stage, it means you are yet to pay bulk of the interest and the principal amount. If the loan is at mid-stage (10 years gone, 10 years to go), you would have paid bulk of the interest component, but little of your principal. If the loan is about to end (say 15-16 years completed), almost 75-80% of the interest amount would have been paid already, and only the principal remains.
In your case, if you are paying 20305 per month for 240 months, you end up paying almost 49 lakhs totally, (29 lakhs as interest, 20 lakhs your principal). You have already paid the EMI for close to 30 months now (roughly 6 lakhs), but you can see your principal outstanding is reduced only by 1 lakh. So if you use your savings of 20 lakhs to prepay the entire loan amount, you can save paying 24 lakhs or so as interest in future!
On the contrary, if you choose to invest this 20 lakhs in FD now, your rate of interest will be far less than 10.25% at which you are paying EMI. Also, the interest earned on FD will be taxable. So you will end up losing money in the long run.
Hence, my suggestion will be to use your savings to pre-pay the loan amount. Your tax component will increase as you lose the 2 lakh allowance on interest component, but am sure you will be safe in the longer run.
Thanks Balgates