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POSTED BY ON March 19, 2012 4:01 pm COMMENTS (4)
Hi
I heard from many of my friends to go for Home loan to save tax, generally for more than 15 years.
Isn’t the trap of long term debt, to avoid the tax.May be this is my perception?
Though Home is an asset?
4-5K monthly tax can be saved according Section 24.
For 20L Home loan @11% interest rate, 20 Years Tenure,
EMI :20,644
Total Interest:29,54,560 <==> total amount paid to bank:49,54,560
Monthly Interest (reducing):18,333
Similalry for Car loan (Car reimbursements +Driver Salary).
Is it wise and benifcial to go for this Car and Home Loans to get this benifits.
I am looking for all expert opinions?
Manish, why can’t you post an article how this works,have u posted already?(if i miss) is it benificiary or a kind of long term liability, to save the tax.
How better is to invest/save by staying in rent and accumulate amount required to own house with less burden of EMI?
Looking forward all blog readers opinions?
Regards,
Raju
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Dear Raju, Please search for an old article of dear Manish on http://www.jagoinvestor.com renting v/s purchase. It may help you a bit to understand the whole concept & to put your own position in question & then to get the answer best suitable to your own needs. I’m not giving any yes or no type answer here as the question is very personal in nature & the answer ‘ll change for each individual.
Thanks
Ashal
Technically Home Loan is good and Car Loan is Bad. Technically Good or Bad, its better to be out of debt. Personally i feel uncomfortable when i have debt haunting me.
It is very difficult to buy Home without Loan. The only option would be to close it out ASAP.
With On Going home loan you still can go ahead with smart investments. The investments should be earning higher interest than you are paying for your home loan.
Example, you have taken 15 lakh home loan at 9 % fixed interest. if you can earn 11% for 6 lakhs, then part closure makes no sense.
Hi Raju,
The biggest advantage of going via Home loan is not only tax, but the leverage. Think upon it closely. You buy a house of 50 lacs with just 5-10 lacs of your capital and remaining by way of housing loan. You pay around 10% for your home loan. The increment on the house price by just 15 % would have the following impact:
Increment 15% of 50 lacs – Rs. 7.5 lacs
Interest payout 10% of loan – Rs. 4.5 lacs
Net Capital Gain – Rs. 3 lacs
Return on your capital – Rs. 3 lacs / Rs. 5 lacs = 60%.
It is also a question of affordability. You may not be able to afford a house of 50 lacs if there was not a loan element available.
Regards
BFA
Home Loan is in general a good debt of the amount borrowed is within means. If you look at the total interest paid to the bank it is daunting. It is an incorrect way of looking at the numbers because Inflation eats away a portion of your income each year. Inflation not only hits you hard by rising pricesit also helps you subtly because with increasing Inflation the value of the EMI paid in today’s terms will become lesser and lesser. Indeed a 20L home loan taken for 20 years will only eventually result in a true outgo of 27-28 lacs in today’s terms and not 49 lacs (plain maths). I am not even considering the tax benefits upto 150,000 for a self occupied home and unlimited interest deduction for a second house (ofcourse + the notional/real rent received). A roof over the head is a must for everyone- you can even reverse mortgage it and draw a stream of income in your retirement years. 5k per month savings as you said is tremedous amount and can single handedly fulfil perhaps at least 1 major financial goal for you depending on the contribution duration.
Car Loan is usually a bad debt but given the tax deductions that come (which changes with each employer) – fuel reimbursement and maintenance etc. it is worth looking. Here there is no one size fits all – careful calculations have to be done to see if it makes economic sense to buy a car. If someone already own a car and wants to take care of schemes provided by employer/tax deductions available it makes a lot of sense. There are car lease programs run by ’employers’ which give you can offer to buy the car after 4-5 years at a minimal 10% cost while also providing tax free EMIs. Considering all these in some cases it definitely makes sense to go for a car. But this is an ‘to each his own’ case.