Which Is More Viable? Investing in A Property or Prepay the Loan
Aug 08, 2016 Home Loan
There are many moments in life when you fall in a situation wherein you are confused which path to choose. One such situation can be when you receive an annual bonus or happen to get another lump sum payment, now what to do with that money? Whether to invest it in some other investment? Or should they use it to prepay an existing home loan?
In most cases, people will prefer to pay off their outstanding home as an existing home loan is always a stress and if you have an opportunity to get rid of that stress then why not! A Sebi-registered investment adviser, suggests that one must pay off their home loan at the very earliest as the future is unpredictable and many unfortunate things can happen like the death of the only earning member, losing of job, serious illness and so on. He states that one such treat paying off the home loan as a mind game rather than a number game.
However, there are also cases when paying the home loan at regular EMI schedule does not seem troublesome or stressful. This is mainly due to the tax benefits that a particular home loan offers. In an EMI, the principal component is treated under section 80C as an investment. Under Section 24, the interest component is deducted from the taxable income of a person. For a self-occupied house or property, the annual deduction is limited to an amount of two lakh per annum in respect to the interest component of one’s housing loan. For interest paid above two lakhs, no deduction on interest could be claimed. Hence, if one’s annual interest is higher than two lakhs then it is better to prepay the loan and save yourself from future payment of interest.
One can optimise his or her tax benefits in cases when the loan has been taken jointly with your spouse. In such cases of joint loan holders, there is no such need to prepay if the loan outstanding is less than 40 lakhs.
A person should pot for investment over prepayment, only in cases when post-tax return from your investment will be higher as compared to the effective cost of your outstanding home loan. For the 30 percent tax bracket investors, who have an outstanding home loan less than 20 lakhs for them the effective cost of their loan would be only 6.65 percent. Now since there are many tax-free as well as risk-free debt options like PPF which offers higher returns, thus it is wiser to invest in these.
If a person’s risk bearing capacity is higher, then one can even consider investing in Equities which generate better and higher returns.
In most cases, people will prefer to pay off their outstanding home as an existing home loan is always a stress and if you have an opportunity to get rid of that stress then why not! A Sebi-registered investment adviser, suggests that one must pay off their home loan at the very earliest as the future is unpredictable and many unfortunate things can happen like the death of the only earning member, losing of job, serious illness and so on. He states that one such treat paying off the home loan as a mind game rather than a number game.
However, there are also cases when paying the home loan at regular EMI schedule does not seem troublesome or stressful. This is mainly due to the tax benefits that a particular home loan offers. In an EMI, the principal component is treated under section 80C as an investment. Under Section 24, the interest component is deducted from the taxable income of a person. For a self-occupied house or property, the annual deduction is limited to an amount of two lakh per annum in respect to the interest component of one’s housing loan. For interest paid above two lakhs, no deduction on interest could be claimed. Hence, if one’s annual interest is higher than two lakhs then it is better to prepay the loan and save yourself from future payment of interest.
One can optimise his or her tax benefits in cases when the loan has been taken jointly with your spouse. In such cases of joint loan holders, there is no such need to prepay if the loan outstanding is less than 40 lakhs.
A person should pot for investment over prepayment, only in cases when post-tax return from your investment will be higher as compared to the effective cost of your outstanding home loan. For the 30 percent tax bracket investors, who have an outstanding home loan less than 20 lakhs for them the effective cost of their loan would be only 6.65 percent. Now since there are many tax-free as well as risk-free debt options like PPF which offers higher returns, thus it is wiser to invest in these.
If a person’s risk bearing capacity is higher, then one can even consider investing in Equities which generate better and higher returns.
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