POSTED BY July 17, 2014 11:10 pm COMMENTS (6)

ONI took SBI Maxgain Home Loan in 2009. I have been utilizing overdraft facility to maximum extent and reduced Interest out go considerably by parking surplus money in Overdraft account.

Now my interest out go is just around 1 Lakh per annum. My home loan interest rate is 10.25% . My query is regarding raise in exemption limit of income tax on Home Loan interest which is 2 Lakhs in recent budget.

Which one of below is beneficiary ?

1. I continue to park surplus amount in Over Draft SBI Max gain account. Pay an interest of around 1 Lakh and also pay around 30% extra Income Tax since my Home Loan Interest out go is less than 2 Lakhs.

2. Withdraw surplus amount from Over draft SBI Max Gain account. Invest in Fixed Deposit for 9% interest. This will increase my Home Loan Interest per annum to 2+ Lakhs and take advantage of paying less Income Tax.

Kindly get back to me in case of any queries.

Regards

Vaninath

I would suggest, objectively write down the detail steps and the amounts involved in the two scenarios. Consider any taxes, surcharges etc. to be paid. Calculate the in and outflow in each scenario and compare. Do not go by just the gut feeling.

Also, examine your amortization table and check what proportion of the EMI is the interest part. If you are already a few years in your loan and the interest part has reduced substantially, you can think of other places (like tax FD) to park the surplus.

Of course what is substantial is subjective and can change from person to person.

@Nsabhyankar

Very valid point. I totally forgot that earnings from tax saver FD is taxable.

Only advantage is you get tax exemption in the for of 80C.

However I still could not decide which is beneficial from long term perspective.

Parking Surplus in Home Loan or earning via FDs, paying more interest to Home loan and gaining on Income Tax Exemption.

@Credexpert:

Parking surplus in MaxGain does not reduce the loan faster. The way you benefit is that you save the interest on the surplus amount. The interest is calculated not on the outstanding loan but on (outstanding loan – surplus)

@Vaninath:

Please confirm if earnings from Tax saver FD are taxable or not. As per my understanding, the tax exemption is only on the deposit amount. The accrued interest is taxable even if you don’t get in your hands.

Hi,

Thanks for your replies.

In Case 2:

Couple of things to consider before we can conclude.

1. If we make 5 Years Tax Saving FD, we are not taxed on the earnings. So we tend to earn around 9% interest along with 30,000 savings in the form of Income Tax.

2. Based on calculation for 1 lakh in 9% Tax saving FD,

Money spent is Rs. 10150 as extra interest on Home Loan (10.15%)

Money earned will be 30% of Rs. 10150 +Rs. 9,000 (9% of 1 Lakh) = Rs. 12045

Hence it seems that it is beneficial to invest on multiple Tax Saver FD of 5 years and pay more interest on Home Loan and gain on Income Tax.

I understand that liquidity and buffer would be less since I am investing in Tax Saver FD’s which has locking period.

May be it is beneficial to have liquidity in terms of small money in Home Loan account and invest in Tax Saver FD’s.

Please let me know if I missed out something or any mistake in calculations.

Hi,

Lets compare the two situations objectively:

Case 1: Putting Money in Max Gain account:

Suppose you can put 1 lakh more in Max Gain account, this gives you saving on interest at 10.15% i.e. Rs. 10150 saved. Tax on this 1 lakh is Rs. 30,000 already paid(considering 30% tax bracket).

Case 2: Putting Money in FD at 9%:

This gives roughly 6.3% post tax returns giving back Rs 6,300 plus you will need to pay 10.15% interest(i.e Rs. 10150) that you can deduct from your taxable income. So net money saved is 30% of Rs 10150 = 3045 + 6,300

So the saving here is Rs. 9345 where as outgo is Rs. 10150.

The only way this could be benificial is that when you could earn more than 12% return on you invested money.

Please recheck the calculations, in case I missed anything.

Dear Mr.Vaninath,

If you gain by investing in FD and paying more interest on your loan (since outstanding will increase), you can invest in the FD. However, parking the surplus will help you close your loan faster and also reduce your interest burden. Please choose the option which will result in a net gain for you.

Regards,

Credexpert