http://www.myiris.com/financial/storyShow.php?fileR=20120611130647715&dir=2012/06/11
Source: IRIS (11-JUN-12)

If you are one of those ambitious people who have a loan on self occupied property and a let out property and decide to pre pay from your bonus amount, here`s what can help you decide which property to pre pay and why?

Below is an illustration of the loan outstanding on both the properties

 

 

 Particulars  Self Occupied  Rented Out
 Balance Outstanding  54,00,000  35,00,000
 EMI  54,651  36,818 
 Balance Tenure  17 yrs  17 yrs
 Interest break up FY 2012-13  5,91,979  3,58,966 
 Principal break up FY 2012-13  84,187  82,850
 Interest Rate  10.75%  11%
 Rental Income  0  1,80,000

 

Tax treatment and calculation

 

 Particulars  Self Occupied  Rented Out
 Fair Market Value Calculation  0  1,80,000
 Standard Deduction @30%    54,000
 Interest payment deduction  3,00,000*  3,58,966
 Principal Payment deduction  2,00,000*  0
 Total Deduction  5,00,000  4,12,966
 Tax Liability  -5,00,000  -2,32,966

 

*Assuming 2 people are sharing the loan repayment in equal share (50% each) from each of their taxable incomes.

From the above, it makes better sense to prepay the self occupied property first, since the interest deduction is higher (provided the loan is shared equally). However, please note, following are the assumptions.

1. The calculation made above is a as per current Interest Principal break up for the illustration shown and will change if the amounts of interest and principal change and interest rates differ.

2. The illustration assumes, both husband and wife contribute towards loan repayment in equal shares 50% each.

3. The illustration is as per current tax laws.

In addition, it is not recommended to reduce one`s EMI, especially at such high home loan rates.

This would increase the tenure and subsequently the interest payable.

(Contributed by Dilshad Billimoria BBM, LUTCF CFPCM, Certified Financial Planner and Investment Advisor. He can be reached at dilzerconsultants@gmail.com)