EMIs, or equated monthly installments, have become a part of most of our lives. Right from a house, to a car or even an LCD is available on EMIs. Then there are pre-EMIs that are more common in the real estate market as many investors typically book flats in under-construction projects.
EMIs vs Pre-EMIs:
Let us assume you have bought a house in a 20-storey building by paying a token money of 50,000 — 15% of the total cost along with society charges before plinth level and 3% money with every floor slab. In that case, 20% of the amount may be disbursed when the second slab is completed and so on. In such a case, the bank will not disburse the entire loan at one go. The sanctioned loan amount is disbursed in tranches to the builder as defined in the loan agreement.
At this stage of partial disbursements, you pay only the interest component of the disbursed amount, which is called the pre-EMI. If the project is scheduled for completion in December 2011, you would be paying pre-EMIs till then.
Pre-EMIs and Tax Benefits:
You can avail of tax benefits on the interest component of the pre-EMI only after the construction is completed. But that doesn't mean you will not get tax benefits on pre-EMIs at all. Once the construction is completed, you can show the pre-EMI interest payment in five equal installments in subsequent years. For example, if the pre-EMI payments aggregate to 5 lakh, then 1 lakh will be shown over five years. However, you cannot claim any tax exemption on the principal amount, if paid in this period. But that shouldn't deter you from partly prepaying the principal component of the loan.
Anyway, the tax deduction for principal falls under the 1-lakh limit of Section 80C. This limit is usually exhausted for most working professionals as company PF, insurance and ELSS schemes also qualify as tax-saving investments under the same 1-lakh limit. On the other hand, any principal payment will only reduce your interest costs.
