Home Loan Vs Tax benefit calculation.

POSTED BY Prashant ON May 17, 2012 11:34 am COMMENTS (4)

I have done some calculations to undertand total outflow in home loan versus net returns on re-investment of tax savings, need your views on it.

House loan = Rs 25,000 (joint loan – 50% each)
Interest rate = 11%
Period = 180 months
EMI = Rs 28415 (joint emi)

Tax savings –
Maximum = Rs 150000 under Sec 24 on interest
Maximu = Rs 100000 under Sec 80C on principal

Assuming possession on day 1.

Assume = Rs 12000 per head per year principal taken under Sec 80C
Assume = tax bracket of 30% both

Tax savings (year 1) = Rs 106471 —> re-investment on FD for 15 years @ 8% post-tax rate = Rs 312726. (joint).

Similarly other data points will be –

Tax Savings on Interest u/Sec 24 @30% bracket joint loan + Rs 25,000 of principal u/Sec 80C Investment of tax-savings @ 8% rate
8%
Year Annual interest paid Tax savings “FD return
after completion of
180 months from 1st installment”
1 INR 271,570 INR 106,471 INR 312,726
2 INR 263,538 INR 104,061 INR 283,008
3 INR 254,576 INR 101,373 INR 255,274
4 INR 244,578 INR 98,373 INR 229,371
5 INR 233,423 INR 95,027 INR 205,156
6 INR 220,976 INR 91,293 INR 182,495
7 INR 207,090 INR 87,127 INR 161,266
8 INR 191,596 INR 82,479 INR 141,354
9 INR 174,310 INR 77,293 INR 122,654
10 INR 155,023 INR 71,507 INR 105,067
11 INR 133,504 INR 65,051 INR 88,502
12 INR 109,496 INR 57,849 INR 72,873
13 INR 82,709 INR 49,813 INR 58,101
14 INR 52,822 INR 40,847 INR 44,114
15 INR 19,477 INR 30,843 INR 30,843

Net, i wil pay Rs 51 lakh on principal + interst.

Investment returns will give Rs 23 lakh at the end of 15 years.

So, net i pay Rs 28 Lakh, which i think is good.

Am i thinking right?

4 replies on this article “Home Loan Vs Tax benefit calculation.”

  1. Prashant says:

    Hi Guys,

    Sorry, i couldnt reply earlier.

    Thanks for the respones. Very useful indeed.

    I am not taking much of the principal component for calculating tax rebate in section 80C as practically, it will not be possible, considering that EPF, PPF, insurance options will always consume a major percent of Rs 1L limit. The value that i have taken as principal (Rs 12K) is just a notional value, which i think is the right value.

    Regarding re-investment rate of 8%, i have made the correction and changed it to 6.75%. This leads to a investment returns of Rs 20L and thus a net payout of Rs 31 lakh instead of Rs 28L as calculated above.

    @growyourmoney – i tried to understand the point you are making in point no 2 and done some re-calculations, let me know if i am thinking right –

    When i say that i am paying Rs 28415 as EMI or (Rs 340979 as annual outflow), i need to calculate the total outlflow at the end of 15 years so as to make a comparison with the total inflow from the re-investment of tax returns coming at the end of 15 years (apple to apple comparison), so using this premise, my total outflow for making loan payment will be more than Rs 51 lakh (as calculated above). Assuming the same rate of 6.75% for investing the outflow for every year till end of 15th year, this comes out to be Rs 82L.

    So summary is net outflow to get the loan is Rs 82L,

    Year Annual EMI paid “Return from FD of annual EMI
    after completion of
    180 months from 1st year” Annual Tax savings “Return from FD of annual tax savings
    after completion of
    180 months from 1st year”
    1 INR 340,979 INR 823,422 INR 106,471 INR 257,114
    2 INR 340,979 INR 773,166 INR 104,061 INR 235,958
    3 INR 340,979 INR 725,977 INR 101,373 INR 215,833
    4 INR 340,979 INR 681,669 INR 98,373 INR 196,663
    5 INR 340,979 INR 640,065 INR 95,027 INR 178,378
    6 INR 340,979 INR 601,000 INR 91,293 INR 160,910
    7 INR 340,979 INR 564,319 INR 87,127 INR 144,195
    8 INR 340,979 INR 529,877 INR 82,479 INR 128,171
    9 INR 340,979 INR 497,537 INR 77,293 INR 112,781
    10 INR 340,979 INR 467,171 INR 71,507 INR 97,971
    11 INR 340,979 INR 438,658 INR 65,051 INR 83,686
    12 INR 340,979 INR 411,886 INR 57,849 INR 69,878
    13 INR 340,979 INR 386,747 INR 49,813 INR 56,499
    14 INR 340,979 INR 363,143 INR 40,847 INR 43,502
    15 INR 340,979 INR 340,979 INR 30,843 INR 30,843
    Total INR 5,114,686 INR 8,245,614 INR 1,159,406 INR 2,012,382

    So, the net payout will be Rs 62L. (Rs 82L – Rs 20L) for getting the house.

    It is signficant just that the house value will also appreciate in 15 years.

    Ahh..please help again?

    1. Dear Prashant, if you are not able to take full loan principal benefit now, please ignore it al together. The reason is, within a year or so, your PF alone can bridge that 12K gap so all your tax saving related calculation from home loan ‘ll change.

      Thanks

      Ashal

  2. Dear Prashant, the basic idea of your thinking is OK. Few points are needed to be discussed-

    In the first year itself the combined Principal repmt. ‘ll be more than 60K Rs. Then why you are only considering 12K for each person?

    @ 30% Tax slab, how can the FD rate be 8% post tax?

    Please read my another reply in the below link –

    http://localhost/jagoforum2/taking-home-loan-on-fixed-deposit/3563/#comment-12186

    Thanks

    Ashal

  3. Your thought process is absolutely right. However I would want you to consider a few points and do more calculations before embarking on this:

    1) The principal contribution of 12k to tax savings for each person is something you should ignore. There are excellent tax saving avenues in PPF/ELSS for 80C savings and for many people it is advanatageous to maximize PPF to 1 Lac. Run your numbers without it. [Counter argument may be that the saving thus achieved can itself be pumped into PPF!]

    2) Netting out Payments and Income is not the correct way unless all those transactions happen in a few days. The cash outflow is spread over 15 years and the final cash inflow is coming in at Year 15. The IRR of such a scenario is lower. Consider this:Person A pays Person B 1 Lac each year for for 15 years. From Year 16 to Year 50 Person B pays back to Person A the same amount of 1 Lac. The IRR/return for Person A is just 3.67%. Thus you need to work back the returns.

    3) Getting a 8% post tax FD for someone in 30% Tax bracket is 11.5% pre tax return which means you must go for corporate deposits which are riskier than Bank FDs. If you will consider investing the savings in a MF SIP the entire calculation makes sense.

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