POSTED BY May 24, 2013 9:17 am COMMENTS (5)

ONHi

1) I have a home-loan of about Rs 25 lacs, for 20 yrs, of which 15 lacs has been disbursed by the bank. On this, I am paying an EMI of about 17000 p.m. I am using the EMI to gain on the tax benefit.

2) I surrendered a ULIP policy and got about 13 lacs.

3) I have a goal of getting about 20 lacs in 7 yrs, in time for the child’s higher education needs.

So, my question is, on what is the best way to reach the goal, with the amount ?

A) So, should I repay the home-loan and invest the EMI saved towards some MF ?

Or

B) Invest the lump-sum in some post-office scheme for long-term ? I am wary investing this amount into equity ?

Thanks

Ashok

Dear Ashish, please do not calculate pure on the basis of tax benefit. Also, the result ‘ll be very different if the same 6L Rs. are invested in an Eq. fund for remaining 20Y period.

Thanks

Ashal

Dear Ashal,

The mathematics behind this a little tedious, but I did calculate. The end result of course is positive for 6 lakh one time investment. If the interest amount saved every year is put into same 8.75% RD / FD, value would be slightly less than the 6 lakh one time.

My whole idea is to understand why to pay additional interest to bank if it not giving any tax benefit.

Ashish

Dear Ashish, instead of giving you a direct answer to you. i w’d like you to calculate this way. Invest 6L Rs. in a simple product like FD @ 8.75% for next 20Y. Assume the tax slab is 30%/ Give here the post tax return generated from this FD. At the asame time, calculate, the saving from non paid interest against the payment of 6L Rs. to home loan & reinvest the same interest.

I w’d like to hear it from your own home work.

Hope you ‘ll enjoy this exercise.

Thanks

Ashal

Dear Ashok, if you can not take Eq. route, please deposit these 13L Rs. into a Debt MFs for next 7 years. Please do not use this amount for loan repayment. By saving the interest outgo you can not create the corpus you want to.

Thanks

Ashal

Dear Ashal,

Sorry to jump in here, but this has now become my habit so as to gain more knowledge through various questions posted by others.

My question here is, if Dear Ashok follows what you are saying then after some time his EMI will rise to about 25,000 (as full disbursement is yet to happen) and if he is the sole loan borrower than he will end up paying around Rs.2.5L as interest for first few years. His tax benefit would be applicable only on Rs.1.5L and rest Rs.1 L paid as interest, would not fetch him any tax benefit and will go to bank as just pure interest.

Whereas If he choose to pay some amount right now and keep rest for investment, his interest benefit would be better. For example, if Mr. Ashok chooses to pay about 6L to bank, his final loan amount would be 19L and EMI of say Rs.19,000. Interest component would be about 1.9L for first year and so on. This way he can continue to get Rs.1.5L tax benefit and also have balance money to put in as per your recommendations. Over and above this additional interest saving (Rs.2.5L-Rs.1.9L = Rs.60K) can be added every year to selected investment avenues in order to reach towards his goal. Since EMI is less, he may choose to add balance EMI (original 25,000-19,000 = Rs.6000 every month) in Debt Funds or as per his choice to keep earning.

All in all, this should reduce his interest outlay to bank which actually is not fetching any benefit.

Need your suggestions for my own understanding and knowledge gaining.

Ashish