Working out the cost factor

Kumara Swamy is the owner of a small kirana shop in Anekal, a town near Bengaluru, with a net income of Rs. 2.4 lakh per annum (Rs. 12,000 pm). He has applied for a home loan of Rs. 6 lakh to construct a house having 600 sq. ft carpet area costing Rs. 8 lakh. The plot is jointly owned by his wife and himself. The interest charged is 9.5% and the loan is to be repaid in 180 EMIs of Rs. 6,266.

Under CLSS, Kumara Swamy is eligible for interest subsidy of 6.5% on the loan amount. Since the subsidy has to be paid upfront with 9% discount, the Net Present Value (NPV) of total subsidy works out to Rs. 230,386.

After appropriating subsidy, the loan amount gets reduced to Rs. 369,614 (Rs. 600,000 – Rs. 230,386). On the reduced loan amount the EMI gets reduced to 3,860.

Thus, monthly savings on account of interest subsidy is Rs. 2,406 (Rs. 6,266 – Rs. 3,860), which translates to Rs. 433,080 over 15 years of repayment. If monthly savings is appropriated to interest payment, the effective interest on home loan reduces to less than 4.55% pa.

Bigger amount

Rame Gowda, a school teacher in Kanakapura town, has a salary of Rs. 5.5 lakh per annum (Rs. 45,830 pm). He has applied for a home loan of Rs. 8 lakh to purchase an apartment in the joint names of his wife and himself. The apartment has a carpet area of 780 sq. ft costing Rs. 10.5 lakh. The interest charged is 9.5% and the loan is to be repaid in 120 EMIs of Rs. 10,352.

Under CLSS, Rame Gowda is eligible for interest subsidy of 6.5% on the first Rs. 6 lakh loan amount. Since the subsidy has to be paid upfront with 9% discount, the Net Present Value (NPV) of total subsidy works out to Rs. 167,592.

Reduced EMI

After appropriating subsidy, the loan amount gets reduced to Rs. 632,408 (Rs. 800,000 – Rs. 167,592). On the reduced loan amount the EMI gets reduced to Rs. 8,184.

Thus monthly savings on account of interest subsidy is Rs. 2,168 (Rs. 10,352 – Rs. 8,184), which translates to Rs. 260,160 over 10 years of repayment. If monthly saving is appropriated to interest payment, the effective interest on home loan reduces to less than 6% pa.

Further, Rame Gowda is also eligible for Income Tax deductions on home loan repayment under Sec 80C and Sec 24 of IT Act.

On a taxable income of Rs. 400,000, for the financial year 2016-17, Rame Gowda is liable to pay income tax of Rs. 10,000 plus cess of Rs. 300, totalling Rs. 10,300.

Since he would be paying interest on home loan amounting to Rs. 58,374 during the year, he can claim deduction under Sec 24 of IT Act for entire tax liability amounting to Rs. 10,300, under Sec 24 of IT Act. Thus his income tax liability becomes nil.

R.P. DESHPANDE