Home Loan - Need or Necessity?

Jul 07, 2017 9:45 IST 4322 views

Written by Vishal Gupta

Vishal Gupta holds wide knowledge and expertise in digital strategy, product management, campaign design and ideation.

Food, water, clothing, breathing, shelter and sleep – basic necessities of a human being, reside at the bottom of the Maslow’s pyramid (hierarchy of human needs –concept by Abraham Maslow in 1970). People work hard to earn these basic necessities and achieve them first in order to move on to the next level of hierarchy.

Being shelter one of these basic necessities – it often confuses one to own a home or live in rent. With increasing property prices day by day, it becomes more and more difficult for a person to get this basic necessity fulfilled. One of the easiest ways to get the same is to avail a home loan.

Today Government is extending helping hands by providing interest subsidy* to the ones who deserve and match the set criteria. One such assistance is Credit Linked Subsidy Scheme (CLSS) under Pradhan Mantri Awas Yojana.

Its eligibility parameters are mentioned below -

CategoryAnnual Household
income
Unit Carpet
Area(Sq.mts)
Interest SubsidyMaximum Subsidy
AMount
EWSUpto Rs 3 lac-6.5%2.67 lacs*
LIGRs 3 lac-Rs 6 lac-6.5%2.67 lacs*
MIG IRs 6 lac- Rs 12 lac904%2.35 lacs*
MIG IIRs 12 lac-Rs 18 lac1103%2.30 lacs*

In addition to these benefits, housing loan EMI payable by the borrower can be claimed under Income Tax Act. The housing loan EMI consists of - principal amount as Rs. 1, 50,000/- deductible under section 80C and interest amount as Rs 2, 000, 00/- deductible under section 24 of the Income Tax Act to get additional benefits.

Person APerson B
Income – Rs 7 lacIncome – Rs 7 lac
Tax Rebate – Rs 3.5 lac (housing loan principal + interest)No Home Loan and tax deduction of Rs 50,000 under PPF
Remaining Amount – Rs 3.5 lacRemaining Amount – Rs 6.5 lac
Taxable Income – Rs 3.5 lac – Rs 2.5 lac (free) = Rs 1 lacTaxable Income – Rs 6.5 lac – Rs 2.5 lac (free) = Rs 4 lac
Tax – 5% of Rs 1 lac = Rs 5000 onlyTax – 5% of Rs 2.5 lakh = Rs 12,500
20% of Rs 1.5 lakh = Rs 30,000
Total = Rs 42,500

The above table shows how home loan save tax

Some of one might hesitate to avail a home loan; perhaps the thought is that one’s residual income is reduced by paying EMI. Well, this thought is to some extent is valid but not for all. If we look at another way, the applicant can save his/her rent, gets tax rebate & subsidy (if any) which can be adjusted towards EMI. And in this context, one should also remember the opportunity cost and law of sacrifice, ‘To be successful in something, you should give up something’

Next question that might come to mind is “what if possession is at the later stage?” Yes, this happens and in this case, one can always opt for PRE EMI option; this is just the interest portion on the disbursed loan amount that one pays until the full disbursal is done.

So to conclude the question we started with “Home Loan – A need or necessity?” – It’s better to say it’s a need driven by necessity.

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