A number of our readers have written in with queries concerning the PEMI.
Over here, we answer the 10 most frequently asked questions on the pre-Equated Monthly Installment.
1. What is EMI?
Equated Monthly Installment refers to the monthly payment you make on your home loan.
Though it is an unequal combination of interest payment and principal repayment, the total monthly amount is calculated in such a way that it remains constant all through the repayment tenure.
EMI begins when the loan is fully disbursed. That means, once your home loan company makes the entire loan payment, you begin repayment.
What is the tax benefit on home loan pre-payment?
2. How does EMI differ from PEMI?
As mentioned above, the EMI begins only when the loan is fully disbursed.
If the loan is partially disbursed, then only interest payments are made on the amount disbursed.
These interest payments made before the loan is fully disbursed and before actual EMIs begin, are known as pre-EMI.
3. Why does EMI depend on disbursements?
Full disbursement
A full disbursement is when the entire cost is paid at one go; the home loan company hands over the entire payment to the seller.
The cheque is disbursed (it is never in cash) only when you have submitted all the documents required and have made the downpayment.
If this is a resale, then the cheque is made out in the seller's name.
If you are purchasing your home from a builder, then it is in the builder's name.
Partial disbursement
A partial disbursement is made in stages (not at one go as in the case of full disbursement).
When purchasing an apartment from a builder and it is under construction, the home loan company will not release all the payments at one go. The money will be released in stages, depending on the stage of construction.
For instance, after the completion of the first floor, 20% of the payment will be made. After the completion of the last floor, 40% and so on and so forth. Hence payment is construction linked and disbursed accordingly.
The EMI
So the actual EMI payments will begin only after disbursement of the total loan.
Where partial disbursements are concerned, interest will have to be paid on the money disbursed. This is known as pre-EMI Interest or PEMI.
4. What about an advance disbursement?
If the house is still under construction, then a partial disbursement is made.
However, in some cases, the home loan company may be willing to make the entire payment even if the construction is not complete.
This is known as an advance disbursement and will occur only in either of these instances:
i. If the buyer requests the home loan company to do so
ii. If the home loan company is fairly convinced the builder will complete the construction on time.
In such a case, you start paying your EMIs immediately.
5. Does PEMI comprise only of principal or principal and interest payment?
PEMI is just an interest payment made on the amount disbursed till date.
6. Do I have any tax benefits on PEMI? Or are they only available on EMI?
You do get tax benefits on PEMI.
However, you can start availing of them only in the financial year in which construction is complete.
7. If the construction for my house is completed in August 31, 2005, when and what will the tax benefits be available?
If the construction is complete in August 31, 2005, then you will get tax benefits for the financial year April 1, 2005 to March 31, 2006.
The entire interest paid in this financial year will be eligible for deduction under Section 24, irrespective of whether the interest pertains from April to August 2005 (when the property was under construction) or post-September 1, 2005 (when the construction was complete).
Additionally, the entire interest payable till March 31, 2005 (irrespective of the number of years for which the construction was going on) from the date of taking the loan, shall be aggregated and one-fifth of this aggregated amount shall be allowed as a deduction alongwith the interest for the current year.
Such additional deduction will be available for five years from the first year of availing of the tax benefits. In this case, financial year ended March 31, 2006 is the first year.
8. What if construction is to be completed only in August 2006?
If the construction is to be completed in August 2006, then you will get no tax benefits for the financial year April 1, 2005 to March 31, 2006.
Your tax benefits will first be available for financial year April 1, 2006 to March 31, 2007 only.
In such a case, the entire interest payable during the financial year ending March 31, 2007, will be eligible for deduction along with one-fifth of the aggregate interest payable till March 31, 2006.
So all the interest you have paid on your pre-EMIs can be totaled and one-fifth of this will be taken.
9. How is the limit of Rs 1,50,000 applied for such deductions ?
First of all, let me clarify that this limit is applicable only if the property is used for self-occupation. If the property is rented out, then there is no limit on the amount of deduction that can be claimed under Section 24.
If the property is used for self-occupation, then the limit is applied on the total deduction. This is arrived at after adding up the current year's interest and the additional deduction allowable as mentioned earlier.
i. The limit is Rs 1,50,000 if the construction is completed within three years from the end of the financial year in which the first disbursement is taken.
ii. If not, the limit is Rs 30,000.
Let's take the example of the construction of the house being completed in August 31, 2005. Let's also assume that the first disbursement was taken in the financial year ended March 31, 2003. Then the limit is Rs 1,50,000.
If the first disbursement was taken in the financial year ended March 31, 2001, the limit would only be Rs 30,000.
10. If the option of advance disbursement is exercised, will the deduction start being available immediately (as EMI payment starts immediately) even though the construction is not yet complete?
The answer remains the same.
If the construction of the property is not complete by March 31 of the financial year, then no benefit is available for that financial year.
In fact, in such cases, the deduction in respect of principal paid during the years in which the construction is not complete is lost forever as, unlike for interest payable, no similar provision for aggregation of principal exists.
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