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Ask Mint | Prepaying a loan? Consider the tax benefits

Ask Mint | Prepaying a loan? Consider the tax benefits
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First Published: Mon, Jul 27 2009. 12 06 AM IST

Updated: Mon, Jul 27 2009. 12 06 AM IST
To help readers keep pace with what’s happening in the real estate sector, Mint’s Q&A appears every other Monday.
I have been sanctioned a housing loan from HDFC and I will be taking the disbursement by the end of this month. The loan counsellor advised me to opt for Home Suraksha along with the loan. Is it mandatory?
Home Suraksha Plus (HSP) is an insurance product offered by our group company HDFC ERGO General Insurance Co. Ltd. This policy is designed to safeguard the home loan customers from a number of risks, such as damage to the house and its contents, burglary and theft, critical illness, personal accident and loss of job. Home Loan customers of HDFC Ltd can opt for this policy.
It is not binding on any customer to purchase the policy; however, it is advisable for his/her own benefit, so that in case of any unforeseen circumstances, he/she is well protected to the extent of the coverage of the policy. Long-term coverage is provided to the insured up to five years. The policy sum insured would, however, be based on the loan amount. We also provide the benefit to existing home loan customers.
In 2004-05, I took a floating rate home loan of Rs19 lakh for 20 years from a private bank in Bangalore, for which I have been paying regular EMI. My father has recently retired. He wants to give me the remaining loan amount for the prepayment to the bank from his gratuity/pension fund. What is your advice on this issue? Should I opt for early closure of the home loan?
Prior to taking a decision regarding loan prepayment, it is important to know that a housing loan is a long-term loan, which provides great tax benefits over its tenure. Customers can avail tax exemption of up to Rs1 lakh per annum on the principal amount under section 80C of the Income-tax Act 1961 and upto Rs1.5 lakh per annum on the interest component under section 24(b). This makes the effective interest rate much lower than what the customer actually pays. For example, for a Rs15 lakh loan at 9% per annum, the effective rate is just around 4% post-tax. Hence, it is advisable not to prepay the loan. Instead you may want to invest your amount in financial instruments, which could be more rewarding. Please consultan a financial expert for further guidance.
Renu Sud Karnad is joint managing director, HDFC.
Readers may write in with their queries and comments to askmint@livemint.com
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First Published: Mon, Jul 27 2009. 12 06 AM IST