Tax Implications on Home-Savers
I want to take home loan of Rs.18 lacs and I have around Rs.7 lacs in my account. I have 3 options with me which are detailed below:
Option 1: I can use my personal savings towards buying the property and take a normal home loan of Rs.11 lacs at an interest rate of 9.50% for the balance.
Option 2: Take a loan of Rs.18 lacsat an interest rate of 9.50% and keep my personal savings in a fixed deposit where I get an interest rate of 7%.
Option 3: Should I opt for the Home Saver or Home Credit or Smart Home scheme and take a loan of Rs.18 lacsat an interest rate of 10% and keep the Rs.7 lacs in the linked current account?
Which option should I select?
You are referring to a very innovative scheme (Home-saver) that has come in the market recently. The interest rate charged on this scheme tends to be 0.50% p.a. more than the rate charged by the same bank for a regular home loan for the same tenure. A good rule of the thumb to check whether this is beneficial or not can be as follows:
Step 1: Calculate the additional amount that you are paying on the home loan due to the higher interest rate. This works out to Rs.9, 000 (0.50% of the home loan of Rs.18 lacs)
Step 2: Work out the additional interest you pay on the loan taken even on your savings portion. This works out to 3% (i.e. 10% interest on your home loan less 7% available on your fixed deposit)
Step 3:Calculate the amount of deposit you will need to earn the amount worked out in Step 1 at the rate worked out in Step 2. This is Rs.3,00,000 (3% of Rs.3,00,000 is Rs.9,000).
Step 4:Compare this amount with the average deposit you are likely to keep in the linked account. In your case since the likely deposit is Rs.7,00,000 this scheme is beneficial for you.
This calculation is for the first year of the loan and ignores the tax differentials and possible changes in the interest rate that can occur over the long tenure of a home loan. This calculation should be treated as a rough indicator of the benefits of this scheme.
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