Repaying home loan? Read this!

K V Gopalakrishnan is running pillar to post, not chasing the lowest possible deal in home loan rates.

Rather, it's because he is clueless as to what he should do post-Budget -- whether he should go for a fixed-rate loan or a floating rate loan, and, more importantly, in light of the recent amendments made in the taxation, he is trying to evaluate the best option in terms of whether to pay up his home loan at the earliest and thereby avail benefit under the Rs 1 lakh tax break by paying majority of the principle.

Alternatively, whether he should extend his home loan to the longest period possible and thereby continue to avail the tax benefit in the payment of interest.

The Budget has given a major boost to housing loans. On the one hand, it has retained the tax exemption benefit on repayment of home loans. This is the only section where the tax benefit for repayment of interest has been retained over and above the Rs 1 lakh limit.

Today all other tax exemptions fall under the new section 80CCE. Under this section, an individual can invest a sum of up to Rs 1 lakh avenues like National Savings Certificate, public provident fund, infrastructure bonds and life insurance policies, and the same will be deducted from an individual's total income.

Housing finance companies are receiving numerable queries from home buyers as to how best they can benefit from taking a home loan, and what would be the ideal product to go for.

Many consumers feel that it would be desirable to quickly pay up the loan and thereby get maximum advantage under the Rs 1 lakh slab as the principle deduction falls under this category. Some of the housing finance companies have come out with special products to address this.

What one should remember is that it is not possible to take advantage of the tax break on both the principal repayment and interest payment sides.

If one were to decide to maximise the principle repayment in a manner that one can avail of the Rs 1 lakh rebate under section 80CCE, then this would mean reducing the time period for paying back the home loan. In that case, the individual would not be able to get a higher tax saving benefit on the interest portion of the loan.

Another thing one tends to forget is that employees' contribution towards the company's provident fund falls under the Rs 1 lakh tax break category.

As such, it would not be advisable to repay a maximum of Rs 1 lakh a year unless one is self-employed and has not saved in any other tax-saving avenues.

Moreover, when one can invest in other products and get a higher rate of return like in the case of public provident fund at 8 per cent or 9.5 per cent under Employees Provident Fund scheme, then it may well be wise to pay an interest on home loans varying between 7 per cent to 8.5 per cent.

Here, too, one can have a sizeable cost savings. Not to mention the tax rebate one gets through the interest component of the home loan.

So before you decide to call up your housing finance company to change your payment schedule, look through the following points.

• Do you contribute to provident fund?
• Do you have an existing insurance policy, for which you are already paying regular premiums?
• Have you bought a pension plan where the annual pension outgo is Rs 10,000?
• Do you have school-going children for whom you'd get a tax break up to Rs 12,000?
• Are you looking at higher returns through investment in unit-linked savings plans or government approved tax saving plans, which offer a higher interest rate than your home loan?

If your answer is yes for any of the above, then you should not be taking any hasty decisions to quickly repay your loan just to avail of the Rs 1 lakh tax break.

After all, all the above items and more fall into the same category under section 80CCE.

What one could do is take advantage of one's savings instrument and assign the securities -- National Savings Certificate (NSC) and life insurance policies -- to the housing finance company.

This mechanism -- balloon payment -- is an enhancement tool, which helps increase the loan eligibility of the customer without increasing the equated monthly instalment (EMI). The present value of the maturity amount of assigned securities is combined with the loan amount to arrive at the enhanced loan eligibility.

So as April draws near, a prudent tax planner should look into these issues and take an informed decision.