By Narendra Nathan, ET Bureau| 9 May, 2016, 12.29PM IST | Economic Times
If you have an outstanding home loan, and happen to have just received an annual bonus or any other lump sum payment, should you use it to prepay your loan? Or, should you invest it to meet some other goals? Assess the following conditions to arrive at the right decision.
The first variable to be considered is psyche: some people may not be comfortable with a large housing loan and to reduce their stress they may want to get rid of the loan burden at the earliest. For them, settling the question of how to use their bonus is simple: just pay off the loan. Gaurav Mashruwala, Sebi-registered investment adviser, categorically states: “You should pay off the home loan at the earliest. Several unfortunate happenings— job loss, death of the earning member, serious illness, etc—can cause trouble during the 10-15 year loan period. Treat it as a mind game and not a numbers game.”
Tax benefit is the next variable. If a home loan does not seem like the sword of Damocles hanging over your head, it makes sense to continue with the regular EMI schedule. This is because of the tax benefits that a home loan offers. The principal component of the EMI is treated as investment under Section 80C. The interest component is also deducted from your taxable income under Section 24. The annual deduction in respect of the interest component of a housing loan, for a self occupied house, is limited to Rs 2 lakh per annum.
You won’t be able to claim deduction on interest paid above Rs 2 lakh. So, if your annual interest outgo is higher than Rs 2 lakh, it makes sense to prepay the loan, and save on future interest payment. For example, the annual interest on a Rs 70 lakh outstanding loan, at 9.5%, comes out to be Rs 6.65 lakh. After taking into account the Rs 2 lakh deduction under Section 24C, the interest component will fall to Rs 4.65 lakh, and bring down the effective cost of interest from 9.5% to 8.64%, even for the people in the 30% tax bracket.
You can, however, optimise the tax benefits if the loan has been taken jointly, say, with your spouse. “If joint holders share the EMIs, both can claim Rs 2 lakh each in interest deduction,” says Harsh Roongta, Sebi-registered investment adviser. In case of joint holders share the EMIs, both can claim Rs 2 lakh each in interest deduction,” says Harsh Roongta, Sebi-registered investment adviser. In case of joint holders, there is no need to prepay if the outstanding amount is less than Rs 40 lakh.
There is no cap on deduction in lieu of interest paid on home loan, if the property is not self-occupied. “Since there is no cap for interest on loan against second or rented out homes, there is no need to prepay it,” says Naveen Kukreja, CEO and Co-founder, Paisa Bazaar. Bear in mind, by prepaying your loan, you may also forego future tax benefits. For instance, if by prepayment, you bring down your outstanding loan amount to Rs 20 lakh, your annual interest outgo for subsequent years may fall below Rs 2 lakh. Thus, you won’t be able to avail of the entire tax-deductible limit and, in such a scenario, prepayment may not be a good strategy. Also, building an emergency fund, if you don’t have one, should take a priority over prepaying the housing loan: “Make sure that you have a contingency fund in place before opt for prepaying your home loan,” says Roongta.
The third key variable is returns from investment of the lump sum at hand. As a thumb rule, you should go for investment, instead of prepayment, only when the post-tax return from the investment is likely to be higher than the effective cost of the housing loan. For investors in the 30% tax bracket, and whose outstanding home loan balance is less than Rs 20 lakh, the effective cost of loan is only 6.65%. Since there are several risk-free, tax-free debt options such as PPF, Sukanya Samruddhi Yojana and listed tax-free bonds, which offer higher annualised return than this, it makes sense to invest in them.
All the debt products mentioned above are long-duration products. If your risk-taking ability is higher and time horizon is longer, you can consider investing in equities, which can generate better returns “It’s sensible for long-term investors (five year-plus holding period) to go for equities, provided they are savvy and understand the risks involved there,” says Kukreja.
There are some home loan products that provide an overdraft facility of sorts and help you maintain liquidity. All you have to do is to park the surplus money in these products and not bother with whether it’s a prepayment or not. It’s like prepayment with the option of taking out that money, in case you need it in future for personal use or for investment purpose. The strategy of maintaining the housing loan interest close to Rs 2 lakh per annum can also be managed by these special loan products. And even if you are going to invest, the SIPs can go from this account.
“I park my bonus and do SIPs in equity from the loan account,” says Kukreja. Most banks charge more for these special loan products. “Though the stack rate differential is more, you can bring it down by bargaining with the banks,” he adds.
Source : http://goo.gl/3ce3eL
Chandralekha Mukerji | Apr 25, 2016, 05.13 AM IST | Times of India
It is the time for annual appraisal letters and the bonus. Many of you might have got your tax refunds too.
While you may be happy to have some extra cash, handling it can be tricky. You need to juggle multiple aims and concerns to maximize your yearly perk. Here are suggestions for getting the most from that extra money .
OPTION 1: Reduce your debt burden
Before you start investing your surplus, pay off your debt. It could be outstanding credit card payments, car loan, personal loan, etc. Start settling your debt in the order of interest rates. The ones with no tax benefits and higher interest cost should be paid off first. Loans that offer tax benefits should be the last on your list.
OPTION 2: Invest in National Pension Scheme (NPS)
Upto Rs. 50,000 invested in the NPS, under Section 80CCD (1b), can be claimed as deduction, over and above the Rs1.5 lakh investment deduction limit under Section 80C. At the highest tax bracket of 30%, this could mean a savings of Rs 15,000 on your next tax bill. Under NPS, it is mandatory to buy an annuity plan with 40% of the corpus at maturity . The remaining 60% can be withdrawn. The Finance Minister has made withdrawals up to 40% of the corpus tax exempt, adding to NPS’ appeal.
OPTION 3: Increase equity exposure
The Sensex has fallen around 12% in the past year, and this provides an opportunity for long-term buyers. You can invest your lump sum in a debt fund and use a systematic transfer plan to move the money into equity funds. You could also earmark this corpus for a goal that is 5-10 years away. For instance, you can use the money towards increasing your down payment for an asset purchase and reduce your future loan burden.
OPTION 4: Invest for your daughter
If your daughter is less than 10 years old, Sukanya Samriddhi Yojana (SSY) is the best debt option to invest in for her future. At 8.6% yearly compounded rate, this is among the highest paying small savings schemes. Investment in SSY is tax deductible under Section 80C, and you can invest up to Rs1.5 lakh per financial year. The principal invested, the interest accumulated and the payout are all tax-free. However, you have to stay invested till your child turns 21.
OPTION 5: Build corpus to buy a house
An extra Rs. 50,000 in tax break has been introduced for first-time home buyers where loan amount is less than Rs 35 lakh and the property’s worth is not more than Rs 50 lakh. Use the bonus to increase the size of your down payment. It will bring down your loan requirement, which means lower EMIs and, if it falls below Rs 35 lakh, there’s the extra tax benefit as well. Put the bonus in an income fund if purchase is less than a year away.
OPTION 6: Build an emergency corpus
If you do not have an emergency fund, you should use your bonus to build one.You should invest the money in highly liquid options such as short-term debt funds. The corpus will help you manage sudden, unplanned expenses.
Source : http://goo.gl/QPXcFx
By Yogima Sharma | ET Bureau | 11 Feb, 2016, 07.00AM IST | Economic Times
NEW DELHI: The Employees’ Provident Fund Organisation is considering doling out a Rs 750 crore bonus to its subscribers for 2015-16 instead of raising the interest rate, a first of its kind move that could translate into double-digit returns for crores of workers on their retirement funds.
EPFO had earlier proposed raising the interest rate to 8.95% in the current fiscal year, compared with 8.75% in 2013-15 and 2014-15, based on its earnings estimate for the year.
The proposal had met with some resistance from the finance ministry as it would put pressure on it to raise interest rates on small savings schemes and would not be sustainable going forward. Therefore, the retirement fund body that manages the savings of more than 5 crore organized sector workers is considering a onetime bonus payment.
“We are considering the option of bonus for the first time because this would substantially benefit people in the low income bracket who are otherwise not entitled for an income tax exemption for deductions under PF,” a senior government official, who is privy to the proposal, told ET. Only those subscribers who have contributed for 12 months in a row would be eligible for the bonus. As per EPFO’s internal estimate, around half its subscribers would get bonus this year if the proposal went through with this condition.
“In a way we are introducing differential interest rate for our subscribers under which low income people would get double-digit interest rate for their deposits in the current fiscal (year),” the official said, speaking on the condition of anonymity.
The February 16 meeting of EPFO’s Central Board of Trustees – it includes representatives of the government, employees and employers – would weigh both options (bonus payout and an increase in interest rate) and will make a final decision.
To become effective, it will then have to be notified by the finance ministry. The proposal of differential interest rate, however, is likely to face stiff opposition from trade unions including RSS-affiliate Bhartiya Mazdoor Sangh.
“We don’t appreciate the idea because it is only benefiting a few and not all EPFO subscribers. What they propose to distribute as bonus is the surplus income from the contribution of all employees and hence it should be equally distributed,” Vrijesh Upadhya of BMS said.
EPFO provides the interest from the returns on investments it makes, without any assistance from the government. So, workers’ representative are of the view that there is no difficulty in providing a higher rate of interest for the current fiscal year.
Source : http://goo.gl/1FWWIq