Real estate to me is a lifestyle consumption good and not an investment category. Hence my opinions on home loans also differ a lot. Please note that this article is directed for white collar salaried professionals who are taking loan as a tax planning tool and not as a financing tool.
My reasons for not taking home loan:
- 80C is an overused tax saving tool. Its limits are ridiculously low and after netting your PF, insurance etc. most white-collared professionals have no limit left to leverage through home loan repayments.
- INR 1.5Lakhs interest subsidy on home loans: This makes sense if you are in the market for a 15-18Lakh loan. However, if your house is going to cost 1CR+ (cost of a 3BHK in a decent locality by a reputed builder), then your loan will be 70Lakhs plus, making the interest subsidy insignificant. Also for anybody paying more than 12-13k a month on house rent, would realize that they end up being a net tax loser because of house ownership.
- HRA: Your tax planner rarely talks about it and very few people understand that house ownership makes them ineligible for HRA benefit. (House rent allowance is good 40-50% of one’s basic pay). If you don’t take a loan, you don’t have to worry about loan eligibility, you can have a dependent own your house and claim HRA.
- Interest spread (only applicable if you have enough capital to finance the house purchase): SBI Home loans is at 8.75% (https://www.sbi.co.in/portal/web/interest-rates/home-loans-interest-rates ) while the FD rate are 6.75% pre-tax (https://www.sbi.co.in/portal/web/interest-rates/domestic-term-deposits-below-one-crore ) Mind you that only partial amount of your loan is tax free but all of your interest income is fully taxed. Hence this 2% of interest rate actually increases once you do the tax math. Also this spread will eat away any tax savings that you had envisioned.
- Essentially you need earn about 12.5%+ if you pay the taxes, pay off the loan and make a profit from this financial engineering. Don’t you think it is quiet steep? If you invested in stock market (directly or through mutual funds), you save on the taxes. But it is a sound investment only if you understand the risk & perils of borrowing to fund your stock market portfolio.
- The 8.75% sticker price of home loans is also not without caveats. It forces you to take an insurance policy, increases the cost of paperwork, filing/administrative trouble etc. all that needs to be accounted for. The stamp duty (esp. in NCR) varies if the wife, husband or both own the property. This saving is foregone if the bank loan is availed.
- Also do keep in mind that the tax benefit of house ownership can be availed only for two times in one’s lifetime. So if you repay the loan fast, you have squandered away this opportunity. Also remember that certain tax advantages cannot be availed till the property construction is complete.
- Couples often end up with joint ownership of property when they avail home loans because of eligibility & better interest rate reasons. This has a hidden cost because the next property purchase either one of them does will end up costing them with a deemed rental income tax. If the property was owned by only one of the couple, then the third property would have the deemed rental income.
Home loans are the lowest cost borrowing offered by institutions & is further sweetened by various sops by the government. Monthly EMI payments also forces a financial discipline for those who are not very strict about maintaining a monthly budget. Hence ignoring loans is not the idea of this post. It is directed to a small set of people who take a loan not because they need to, but because they think it is a smart tax planning tool. Lastly, please talk to your financial adviser (preferably one who is paid by you and not by the banks/mf to guide you)