This reprieve, though considerate, has led to a lot of questions about the financial benefit of opting for the moratorium. The deferral will no doubt provide some breathing space to individual borrowers. However, the long-term consequences of this delay in paying back the EMIs could be very expensive. EMIs are structured in a way that the interest component forms a bigger portion of the repayment in the initial years. So, if you are missing EMIs early on in the loan schedule, a bigger amount of unpaid interest gets added to the loan. Additionally, longer the tenure, higher is the impact cost one will have to bear.
Another very important aspect that hasn’t been highlighted enough is the impact of the EMIs on your tax savings. If you opt for an EMI moratorium on your home loan, you will be unable to claim tax deduction. Let us understand how this happens.
How do you avail tax savings on a home loan?
To understand how we can get impacted by the EMI moratorium, let us first determine how we can opt for tax savings. Anyone who has bought a house after taking a home loan can claim tax benefits on the repayment of the loan amount.The Government of India offers tax benefits on home loans under the Income Tax Act of 1961. Home loan borrower can get benefit of tax deduction on principal repayment under Section 80C, tax deduction on interest under Section 24, and additional home loan interest tax benefit for first-time home buyers under Section 80ee.
|Tax deductions allowed on home loan principal + stamp duty registration charge|
|Relevant Section/s in the income tax law||Section 80C|
|Upper limit on tax rebate||Rs1.50 lakh per annum|
|Upper limit on tax rebate for senior citizens||Rs2 lakh per annum|
|Tax deductions allowed on home loan interest|
|Relevant Section/s in the income tax law||Section 24, Section 80EE, Section 80EEA|
|Upper limit on tax rebate||Up to Rs3.50 lakh per annum|
|Upper limit on tax rebate for senior citizens||Up to Rs4.50 lakh per annum|
What happens when you opt for a moratorium?
During the moratorium period, no EMIs will be deducted from a borrowers account. This means the deductions will get paused till actual EMI dues paid/payable until February 2021. This is because the RBI has extended the moratorium period till August. Thus, your tax deduction for this financial year will be impacted significantly while simultaneously increasing your tax liability for FY20-21.
Suppose an individual payingan EMI of Rs40,500 for a home loan of Rs32 lakh has opted for the 6-month moratorium. Suppose he decides to extend his tenure rather than paying increased interest rates. This helps keep his EMI installments constant.If we assume that this is his first house and the rate of interest is 9%, his total tax savings for FY20-21 would be Rs283,500 at the end of moratorium period, as against Rs356,000 in case if moratorium was not opted.
|Particulars||If not opted for loan moratorium (Rs)||If opted for loan moratorium (Rs)|
|Total Loan Repayment||486,000||283,500|
|Tax Saving Under 80C||150,000||120,167|
|Tax Saving Under section 24||200,000||163,333|
|Tax Saving Under 80EE||6,000||-|
|Total Tax Savings||356,000||283,500|
Hence, it is always better to look at the long-term consequences before opting for a moratorium. The benefit of choosing that should surpass the costs of suspending your EMIs. As we have observed, the interest payable on the loan will be higher and have tax implications as well. And as has been the general consensus, it is advisable to opt for the loan moratorium only if you are facing a liquidity crisis. In any other circumstance, you must opt for paying your EMI's regularly.