Which Loan to payoff first – Education or Home (Both at 10.25% floating)

POSTED BY anubhavit ON April 28, 2014 1:41 pm COMMENTS (11)

I have two loans currently ongoing ,
  • Education Loan (10.25% floating, I am co-applicant with wife with wife pursing full time higher education). Current disbursal ~ 9 Lakhs.
  • Home Loan (10.25% floating, applied under my name). Current disbursal is 0 Rs, but need to pay around 6.5 Lakhs in next 2 months to developer. The home will be handed over in Aug 2015.
Take home salary currently is around 1.2 Lakhs per month, with around 2.5 Lakhs cash available in bank accounts.
I have two options,
  • Stockpile salary of the next two months, and let the education loan as is without prepayments of education loan. In this case, I will directly pay for the home loan when it is required after 2 months completely, without disbursing anything from bank for the home loan.
  • Payoff the education loan partially immediately, i.e. even 2.5 Lakhs and keep paying off the education loan as salary is credited.

The reason I enquire about this is that under taxation law,(though I dont have full knowledge) but there is Section 80E for education loan deducation, and another section for home loan interest deduction. Can you please advise which is the most suitable option for me.

11 replies on this article “Which Loan to payoff first – Education or Home (Both at 10.25% floating)”

  1. ashalanshu says:

    Dear Anubhavit, I’m trying to help you. You are missing the point that saved tax amount is not in your pocket. it’s in bank’s pocket. So continuing any loan just for sake of so called tax benefit is wrong approach. Either Invest the amount elsewhere to earn higher or pay out the loans you are running.

    Thanks

    Ashal

  2. anubhavit says:

    If my taxable income(fnal taxamble income) is 8 Lakhs per annum. Because of the amount paid for education loan I will get 60,000 Rs deduction(exemption) based on option 2 n the response above. Thus my taxable income will become 7.4 Lakhs per annum.

    Indirectly, the effective rate of interest of 10.25% loan is 10.25% – 30% of 10.25 = 7.175% only. Hence paying the loans prudently will help reduce my taxable income.

    Can Manish look into this query of mine, as this doesn’t seem to be going into a fruitful discussion.

  3. ashalanshu says:

    Dear Anubhavit, let me elaborate for you. Assuming you are in 20% Tax slab. So you mean to say, as You have paid 100 Rs. as interest towards Education loan, you w’d not have to pay 20 Rs. as income Tax. Now twist in the tale is – you did not save the tax amount. I repeat AMOUNT. That 20 Rs. is not in your pocket. It’s with Bank from where you tok education loan. It’s like this – You paid 20+80 = 100 Rs. at a window and then refuse to pay 20 Rs. on the 2nd window.

    Now can you say again that you are saving Tax amount?

    Thanks

    Ashal

  4. anubhavit says:

    As per section 80E, the interest paid for education loan is exempted from tax. Same goes for the home loan but as my house is not under possession till August 2015, so I am not sure what is the tax treatment.

    The above information regardng the Section 80E and Section24B was obvious perhaps hence I didn’t mention earlier. I am expecting all information required to make a suggestion has been provided already, hence I am unable to get what else you need from me.

  5. ashalanshu says:

    Dear Anubhavit, please do tell me how your saving tax amount against section 80E for education loan and section 24 for home loan?

    Thanks

    Ashal

  6. anubhavit says:

    Hi Ashal,

    Ok, let me discusss the two options I have.
    1. Paying off education loan as much and as quickly as possible instead of home loan.

    By end of FY, i.e. 31-03-2015, The interest would be(as an example),

    Education Loan = 30000 (the loan would be prepaid everytime I get my salary).
    Home Loan = 50000 (as I would disburse the loan in the coming months, without financing myself)

    2. Paying off home loan/self financing home, and not paying anything for education loan.

    At 31-03-2015, the interest would be as an example,
    Education loan – 60000
    Home loan – ~10000 (for only some loan taken for only a short period of time, as it will be pre paid by me everytime and stockpile the salary in Liquid fund to meet every House payment demands from developer)

    Considering the above scenarios as an example, my understanding is that strategy 2 should be the option to be taken as for education loan I will get a deducting under 80E in the current FY. Let me know if my understanding and approach is correct.

    Consider that my strategy is to pay off education loan as much as possible. In that case,

  7. ashalanshu says:

    Dear Anubhavit, emergency funding thing is OK to me. I want to understand your calculation to profit (tax benefit) from education or home loan interest benefit. Regarding having a call, I’m out of India. So FB Chat or Gmail Hang out are the options with you.

    Thanks

    Ashal

  8. anubhavit says:

    Hi Ashal,

    Sorry in case I was not able to understand, but your query regarding emergency fund I tried to answer by replying that Emergency fund is kept separate and is available with me, I am not using that to pay off any loan. Can you let me know what ither information exactly you need from me.. if possible, can we discuss this over a call?

  9. ashalanshu says:

    Dear Anubhavit, are you really saving the Tax amount on education interest or home loan interest? Please read and reread my query before answering.

    Thanks

    Ashal

  10. anubhavit says:

    Hi Ashalanshu,

    Yes, I have the emergency fund separate. Coming back to my loan query, If I prepay education loan, I will not be fully utlizing the 80E benefit. Due to the 30% tax deducation available, the effective education loan rate of interest is ~7% for me, whereas for home loan whenever it is needed would be 10.25% only as there is no tax benefit because of no possession yet, hence I should pay the home loan/self finance it as much as possible. Is my inference correct?

  11. ashalanshu says:

    Dear Anubhavit, in case of home loan, no benefit for you as on date on interest as possession is not with you. Do you have enough emergency fund at your disposal as on date?

    Thanks

    Ashal

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