Skip to main content

Prepay Your Home Loan or Invest and get Returns

Apply Home Loan Online
 
 
Several individual specific factors determine whether to prepay one's home loan or use the surplus income to invest
 
If you have an outstanding home loan, and happen to have just re ceived an annual bonus or any other lump sum payment, should you use it to prepay your loan? Or, should you invest it to meet some other financial goals? Assess the following conditions to arrive at the right decision.

Some people may not be comfortable with a large housing loan and, to reduce their stress, they may want to get rid of the loan burden at the earliest. For them, settling the question of how to use their bonus is simple: just pay off the loan. You should pay off the loan for the house you live in at the earliest. Several unfortunate things--job loss, death of the earning member, serious illness, etc--can cause trouble during the 10-15 year loan period. Treat it as a mind game and not a numbers game.

Tax benefit is the next variable. If home loan does not seem like the sword of Damocles, hanging over your head, it makes sense to continue with the regular EMI schedule. This is because of the tax benefits that a home loan offers.

The principal component of the housing EMI is treated as investment under Section 80C of the Income-Tax Act. The interest component is also deducted from your taxable income under Section 24. The annual deduction in respect of the interest compo nent of a housing loan, for a self-occupied house, is limited to `2 lakh per annum.

You won't be able to claim deduction on interest paid above `2 lakh. So, if your annual interest outgo is higher han `2 lakh, it makes sense to prepay the loan, and save on future interest payment. For example, the annual interest on a `70 lakh outstanding home loan, at 9.5%, comes out to be `6.65 lakh.

After taking into account the `2 lakh deduction under Section 80C, the in terest component will fall to `4.65 lakh, and bring down the effective cost of interest from 9.5% to 6.65%, even for the people in 30% tax bracket, but you will still have to pay `4.65 lakh every year in interest.

You can, however, optimise the tax benefits if the loan has been taken jointly, say , with your spouse.

If joint holders share the EMIs, both can claim `2 lakh each in interest deduction. For joint holders, there is no need to prepay , if the outstanding is less than `40 lakh. Bear in mind, by prepaying your loan, you may also forego future tax benefits.

The third key variable is returns from investment of the lump sum at hand. As a thumb rule, you should go for investment, instead of prepayment, only when the post-tax return from the investment is likely to be higher than the effective cost of the housing loan.

For investors in the 30% income-tax bracket, and whose outstanding home loan balance is less than `20 lakh, the effective cost of loan is only 6.65%. Since there are several risk free, tax-free debt options such as PPF , Sukanya Samruddhi Yojana Account and listed tax-free bonds, which offer higher annualised return than this, it makes sense to invest in them. All the debt products mentioned above are long-duration products.


Invest Rs 1,50,000 and Save Tax upto Rs 46,350 under Section 80C. Get Great Returns by Investing in Best Performing ELSS Funds

Top 4 Tax Saver Mutual Funds for 2017 - 2018

Best 4 ELSS Mutual Funds to invest in India for 2017

1. DSP BlackRock Tax Saver Fund

2. Invesco India Tax Plan

3. Tata India Tax Savings Fund

4. BNP Paribas Long Term Equity Fund



Invest in Best Performing 2017 Tax Saver Mutual Funds Online

Invest Best Tax Saver Mutual Funds Online

Download Top Tax Saver Mutual Funds Application Forms


For further information contact SaveTaxGet on 94 8300 8300


Leave your comment with mail ID and we will answer them

OR

You can write to us at

Invest [at] SaveTaxGetRich [dot] Com

OR

Call us on 94 8300 8300

Popular posts from this blog

Birla SunLife Manufacturing Equity Fund

The Make in India program was launched by Prime Minister Naredra Modi in September 2014 as part of a wider set of nation-building initiatives. It was devised to transform India into a global design and manufacturing hub. The primary motive of the campaign is to encourage multinational as well domestic companies to manufacture their products in India. This would create more job opportunities, bring high-quality standards and attract capital along with technological investment to bring more foreign direct investment (FDI) in the country.   Why India as the next manufacturing destination?   The rising demand in India along with the multinational's desire to diversify their production to include low-cost plants in countries other than China, can help India's manufacturing sector to grow and create millions of jobs. In the words of our Honourable Prime Minister- Mr. Narendra Modi, India offers the 3 'Ds' for business to thrive— democracy,...
Read more

Total Returns Index brings out real Equity Funds Performers

From February, equity mutual funds have to change their benchmarks to account for dividend payments. Until now, funds used price-based benchmarks alone. TRI or total return indices assume that dividend payouts are reinvested back into the index. What this does is lift the overall index returns, because dividends get compounded. For example, the Sensex TRI index will consider dividend payouts of its constituent companies while the Nifty50 TRI index will consider dividends of its constituents. Using TRI indices as benchmarks comes on the argument that an equity funds earn dividends on the stocks in its portfolio, which they use to buy more stocks. Therefore, using an index that also considers dividend reinvestment would be a more appropriate benchmark. Shrinking outperformance With a stiffer benchmark, it is obvious that the margin by which an equity fund outperforms the benchmark would shrink. Rolling one-year returns from 2013 onwards, the average margin by which largecap funds out...
Read more

Kisan Vikas Patra - KVP

  Kisan Vikas Patra (KVP) First launched in 1988, the Kisan Vikas Patra (KVP) is one of the premier and popular saving scheme offering from the Indian Postal Department. This product has had a very chequered history- initially successful, deemed a product that could be misused and thus terminated in 2011, followed by a triumphant return to prominence and popular consumption in 2014. The salient features of KVP are as follows- The grand USP- Money invested by the applicant doubles in 100 months (8 years, 4 months). KVPs are available in the following denominations- Rs.1000, Rs.5000, Rs.10,000 and Rs.50,000. The minimum purchase value for the KVP is Rs.1000. There is no maximum limit. KVPs are available at all departmental post offices across India. These certificates can be prematurely encashed after 2 ½ years from the point of issue. KVPs can be transferred from one individual to another and from one post office to another. ----------------------------------------------------- Inve...
Read more

Stock Review: Havells

HAVELLS India's stock performance has been muted in the past three months, in line with the weak broader market. But, given the turnaround in its overseas subsidiary and the launch of new products in its consumer durable business, the company's stock may undergo a re-rating.    Havells is India's leading consumer electrical goods company, with consolidated sales of . 5,527 crore in the past four quarters. Its wholly-owned subsidiary Sylvania, which makes lighting and fixtures, has established brands in European, Latin American and Asian markets. Sylvania repre sented nearly half of the company's consolidated revenues in the first half of FY11.    Sylvania's poor financials hit Havells' consolidated performance in FY10. But, this has changed in the cur rent fiscal. Havells has reduced fixed costs of Sylvania by exiting from unprofitable businesses and outsourcing manufacturing to low-cost locations such as India and China. In the September 2010 quarter, Sylv...
Read more

Mutual Fund Review: Reliance Regular Savings Equity

    Despite high churn, Reliance Regular Savings Equity has managed to fetch good returns   In its short history, this one has made its mark. Though its annual and trailing returns are amazing, the fund started off on a lousy note (last two quarters of 2005). It managed to impress in 2006 and was turning out to be pretty average in 2007, till Omprakash Kuckian took over in November 2007 and wasted no time in changing the complexion of the portfolio. Exposure to Construction shot up to 28 per cent with almost 21 per cent cornered by Pratibha Industries and Madhucon Projects . Exposure to Engineering was yanked up (18.50%) while Financial Services lost its prime slot (dropped to 6.69%) and Auto was dumped. That quarter (December 2007), he delivered 54.66 per cent (category average: 25.70%).   When the market collapsed in 2008, thankfully the fund did not plummet abysmally. But even its high cash allocations could not cushion the fall which hovered around the category average. ...
Read more
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now