He has two options before him he can either choose the full-EMI option or the pre-EMI option. In the full-EMI option, the amount he pays per month will be calculated based on the full loan amount. In the second option, he will only have to pay the interest on the loan amount at each stage of construction and only start paying the real EMI once he gets possession of the house. On the offset, the second option seems to be more appealing. Tax experts, however, have a different take on it.
In order to fairly analyze the both, we will have to consider various factors:
In the case of a full-EMI option, Mr.Gupta will have to go through shorter loan tenure. How is this? Assume the tenure of the loan is 15 years. In the case of a pre-EMI option, he will be paying only the interest on the loan for 3 years, which is how long it takes for him to get possession of the flat. After this, he will pay his start paying his EMI on the loan, which will go on for 15 years. Therefore, the payout tenure will be 18 years in total. In the case of a full-EMI option, however, the tenure is only 15 years.
In the full-EMI format, payouts are calculated on the total loan amount, whereas in the pre-EMI format, the payout is only calculated on the basis of the actual amount disbursed, which makes the amount much lesser.
There is no real difference in the treatment of tax deductions under both the schemes. The value of the total interest paid will be divided into five equal parts and considered for the tax deduction for the first five years from the date of final disbursement. No deduction is allowed on the EMI repaid on the principal amount during the years that the property was under construction.
Opting for pre-EMI
The pre-EMI option is suitable for the following circumstances:
- If available cash flows are lower initially
- If your plan is to sell the property immediately after possession or in the first few years
- If you’re likely to invest the difference between EMI and pre-EMI in order to generate returns higher than the rate of interest
- If you have an urgent need to use the balance amount elsewhere
Opting for full EMI
Opting for a full EMI makes sense if:
- You want to start enjoying the tax benefits of your investment early
- If your investment is a long-term one, wherein you plan to either move into the property or keep it for some years. This option would make you debt-free earlier.
- If you expect delays in the project completion.