Best Tax Benefits on Pre EMI

If you’re considering a home loan, you probably already know that you’ll be repaying it in the form of Equated Monthly Instalments (EMIs). There are two ways of paying off EMIs, Pre-EMI and Full-EMI. 

Pre-EMI options make sense if:

-      The home you’re investing in is still under construction.

-      You wish to sell the flat/house/villa as soon as the construction is completed and is up for possession.

-      You want to save on taxes by investing in an under-construction project.

-      You treat flat/house/villa as an investment, which can be flipped* for a profit.

*Flipped: invested in at a lower amount and sold at a greater amount, allowing for appreciation over time and additions at the investor’s own expense.

How does pre-EMI work, how is it different from regular EMI payments?

Regular EMIs are a monthly amount that’s calculated by Loan Calculator based on the amount of loan, tenure, rate of interest and mode of calculation of the interest. This amount should be paid by you without fail to the bank or lender, once a month.

Pre-EMIs are slightly different. Here, you take the loan when the building is under construction. The EMIs are calculated in much the same way, but aren’t paid directly by you. Every month, and depending on the stages of completion, the bank pays the builder directly. The only amount that you are liable to pay (directly) is the interest on the amount the bank has paid to the builder.

The loan repayments to the bank (EMIs) will start once the bank has disbursed the total loan amount to the builder.

Best Tax Benefits of Pre-EMI Payments:

1. If you take a home loan with pre-EMI payments, you can be eligible for tax deductions and benefits after the project (flats/houses/villas/etc.) is completed and deemed ready for possession.
2.  The tax deduction is applicable only on the amount of interest paid and not on any principal payments.
3. The total amount is deductible in five equal instalments, starting from the year in which you obtain possession.
4. The maximum deductible amount is Rs.1,50,000.
5. Deduction is under Section 24 of the Income Tax Act, 1961.
6. Any principal paid during this time will not be eligible for tax deduction under any section.
7. Under Section 80C, deductions are available for capital repayment after the construction is completed.
8. If the loan has been taken in the time period between 1^st April 2013 and 31^st March 2014, a deduction can be claimed up to the amount of Rs.2,50,000 for interest paid on the home loan**

**This deduction is a special exemption limit only applicable to first time home buyers and not for those with existing home loans/past home loans. This limit is applicable only for this year (2015), for homes ranging between Rs.25,00,000 and Rs.40,00,000.

 

Other Benefits of Pre-EMI :

-    The scheme is profitable if the construction work is delayed, which happens more often than not in India.

-      Highly profitable and lucrative if you view your flat/home/villa as an investment and sell it after the construction is completed.

-      Any money saved under this plan can be re-invested, the returns from which can be used to repay a chunk of the initial loan.