Monday, March 25, 2019

Home Loan Prepayment: The Whys and Hows

A few years ago, Misha took a large home loan, at a monthly EMI of almost Rs.37,000 and interest rate of 11.75%. She still has to pay close to Rs.26 lakhs of the principal amount with just a little over 10 years remaining. She is looking for options that can help her diminish the loan burden. As home loans are some of the biggest debts we take on during our financial lives, repaying them often becomes a substantial burden on middle-income earners with a fixed salary. However, there are four ways in which you can reduce your home-loan debt—or at least minimize its effects:

1. Transfer your home-loan to a low interest provider: If Misha transfers her home loan to a lender who levies 10.5% interest instead of 11.75%, her loan tenure comes down drastically. If she maintains the same monthly EMI, the reduced interest brings the tenure down to 113 months from 124. The longer you spend repaying your loan, the more interest you have to pay—therefore, Misha will save approx. Rs.4 lakhs in interest.

2. Increase your EMI and reduce the tenure: This can be availed only if your financial situation changes substantially. For example, you had been saving for your child’s education, but she has already left for college. Or your salary has been hiked by 30% or more. Suppose Misha pays Rs.42,000 a month instead of Rs.36,407 a month— her interest tenure comes down to 96 months from 124, as a result of which she pays Rs.476000 less in interest.

3. Make prepayments: Prepayments are payments made towards your loans in large chunks, and at irregular intervals. Here are the basic ways in which they differ from EMI payments:

  • EMIs are compulsory and regular. You pay them every months, and you pay a fixed amount. While this amount can be changed, there is not much flexibility. Prepayment, on the other hand, depends entirely on the loan taker
  • Prepayments are much larger than EMIs, for example the average home loan EMI can be anywhere between 10,000 and 50,000, while prepayments are numbered in lakhs.
  • The most crucial difference between EMI and prepayment is that a large portion of your EMI goes towards payment of interest, at least towards the beginning of the loan tenure. Prepayments, however, go directly towards your principal, thereby bringing down not only the loan tenure, but also the outstanding loan amount.
If Misha makes prepayment of Rs.2 lakhs for 5 years, alongside her regular EMI of Rs.36,407, her total interest will drop by a staggering Rs.8.5 lakhs and her loan tenure will be almost halved— from 124 months to 73 months. Obviously, out of the three options for reducing the home-loan burden, making prepayments is the most profitable one. But while going down the prepayment route, there are a few things you must note:
  1. You will have to pay interest when you are making a prepayment, i.e. the day you make the payment, your principal will decrease and from that point on you will be paying interest on the reduced principal. But suppose you make a prepayment on the 10 of the month— the interest on the original amount for those 10 days will have to be paid as well.
  2. Some loan providers insist on validating your proof of income before accepting prepayment, as these are usually big ticket payments. Therefore it is advisable you carry bank statements for the account from which you are making the payment, dating back to at least three months.
  3. The longer you take to repay a loan, the more your loan provider will earn. Therefore, accepting prepayment is often not in the best interest of the bank, so there might be measures like prepayment charges and limitations in payment mode. There may be a specific period after loan disbursement during which prepayment is not permitted. Also, the borrower may have to be present personally to make prepayment. Acquaint yourself with these rules and regulations before you take the leap.
  4. Once your principal loan amount decreases, your CIBIL score (which reflects your credit worthiness) will improve. Follow up on your credit score within a few months of making the prepayment, to ensure that the reduction in outstanding balance is reflected.
  5. Make sure to preserve the acknowledgement of payment. This document contains important details such as outstanding principal, home loan tenure, and change in EMI (if any).
The catch is, prepayment is possible only in case of a sudden financial windfall, such as yearly bonus or inheritance or gift. Then you would have the dilemma of whether to invest it and increase savings, or whether to prepay your loan and reduce your debt. Our advice is, if the rate of interest from investment is less that the interest you pay on your loan, it is better to make a prepayment. For example, investing in a provident fund would fetch Misha interest at 8.8 currently, while her loan interest rate is 11.75. Therefore, making a prepayment makes better financial sense.

This is a guest post by Team Paisabazaar

Monday, March 18, 2019

6 steps that can make real estate efficient and corruption free in India

Author: Sachin Gupta | Find me on Twitter

We have been writing a lot about the inefficiencies and mal practices in real estate sector in India. A lot of focus of our writing has been on highlighting the issues that plague the industry and how those issues can be tackled. While other ideas such as RTI; Aadhar; and recently Jan Lokpal bill has seen the light of the day, issues in real estate sector still remains unresolved. There is no denying that implementation of RTI, Aadhar, and Jan Lokpal bill will help in eliminating corruption from the government-public interface. But, what about real estate, where most of the cash finds its way? Why is the government not bringing in policy measures to cure the sector? We list some of the measures that can help in eliminating corruption from the real estate sector. In no way, these are the only measures, but, we are confident that implementation of the following measures will certainly help the sector.

  • Equalize market rate and circle rates

As the name suggests, market rates are determined by the economics of demand and supply equilibrium. Buyers and sellers participate in the market and transactions take place fairly & without any stimulus. Circle rates are the minimum rates fixed by the state government and a buyer of the property is entitled to pay stamp duty charges on these rates whenever a transaction takes place. For example, in Gurgaon, the market rate of an apartment in a multistory building is 7000 Rs/sqft, while the circle rate for the same apartment as fixed by the state government is 4000 Rs/sqft. For a 1000 sqft apartment, the stamp duty charges as per the circle rate would be Rs. 320000. While the stamp duty charges as per the market rates would be Rs. 560000. Therefore, it presents an opportunity for the buyer to under report the apartment value on papers in order to save on stamp duty charges. Equalizing market rates and circle rates would eliminate the practice of under-reporting of the property value. However, this may affect the growth of real estate sector because of fewer transactions between buyer and seller. And this can lead to an adverse impact on GDP of the state as well as the country. Well, the move to equalize market rates with circle rates should also be complemented with reduction in stamp duty charges.

  • Reduce stamp duty charges:

Stamp duty charges are exorbitant in most states across India. Stamp duty charges are least in Madhya Pradesh at 0.5%, while they are about 8% in states like Haryana, Punjab, Rajasthan, UP. Now, let’s say stamp duty charges are brought down in all states to a uniform level of 1%. Therefore, one would now pay Rs. 70000 as stamp duty charges on a flat of 1000 sqft with a market price of Rs 7000 per sqft. This move will not only encourage buyers to report market value of the property but will also lead to more and more transactions. Research based on past transactions can result in the optimum value of stamp duty charges which incentivizes true reporting as well as increased velocity of transactions across states in India.

  • Cap on property transfer on government sponsored schemes

On government sponsored schemes such as the recent DDA flats scheme, there should be a tenure cap. In other words, people who applied for the scheme and got allocation should not be able to sell the allocated apartment in secondary market for a fixed time period (say, 5 years). This happens in many countries in EU. The tenure cap will drive away speculators and only the real needy people will participate in the whole process. Can you imagine for 15000 DDA flats, some 15 Lacs application came. But this one looks impractical because banks, government bodies, and agencies all made money by issuing a lottery system. And then, they would say, we are pro-poor and these schemes help poor of the country. We came across a property dealer in Delhi who filled 8 forms for the DDA scheme. He called in various relatives and friends from his native Bihar and he made sure that at-least 8-9 forms were filled. He paid for the whole process and in return if a flat was allotted to any of those 8-9 members, he would share 50% of the proceeds. Everyone knows what a big lottery this whole flat allocation system is, yet government is not changing the policy. And who is benefitting? Government bodies by charging a fee for every form sold; banks for providing upfront money to the customer at an interest; and the rich who already owns multiple properties.

  • Cap on home ownership in certain cities

Certain cities such as Mumbai, Delhi, and other major metros have become unaffordable for the masses. A basic 2BHK is virtually out of the reach for a salaried person and he/she has to go to the outskirts of the city to fulfill his/her dream of home ownership. People with deep pockets own multiple properties in these cities. Housing is considered an investment vehicle first and then the basic need. In China, the government has moved in recent years to quell home price amid worry that surging costs could lead to social unrest and has set Home-Ownership Curbs in Shanghai and Beijing. Can it be done in India?

  • Computerization of property titles across the country

E-governance is the need of the hour. When there is no dearth of talent in the country when it comes to software development and technology, why don’t we see the computerization of property records? In many instances, a single property is registered under 2 or 3 names and this leads to disputes. Computerization of property titles will not only eliminate property disputes but it will also help in land acquisition processes for mass urbanization.

  • Make it easy as far as capital gains tax are concerned

An individual is liable to pay capital gains tax whenever there is significant gain over the buying price. Applicability of long term and short term Capital gains taxes should be made simple. In order to reduce or avoid being liable to pay capital gains tax, an assessee can either purchase a house within a period of one year before or two years after the date on which the transfer took place, or construct a house within a period of three years after the date of transfer. Why can’t we have a common wealth tax instead of so many complicated tax structures?

Is it desirable as far as real estate is concerned or are we just getting too ahead of ourselves?

Have any Questions?

Thursday, March 7, 2019

Top 8 Tips for First-Time Home Buyers in Ahmedabad

Ahmedabad is very much like any other big Indian city. A promise of a good standard of living, high quality education, capital appreciation, budding infrastructure, lots of career opportunities, safety for women and children and a cultural haven make it one of the best bets to buy a home in India. But if you are a first-time home-buyer it can be quite a daunting experience with no proper guidance. Read on to know the top 8 tips if you are a buying a house in Ahmedabad for the first time.

1. Begin saving a part of your earnings every month
The most important thing for you to do is to start saving money as early as possible. Why? The cost of property in Ahmedabad is on the rise and having a surplus of cash in advance will mean you will be able to book your home at the earliest. You will need this cash for the down payment of your new home. A few things you can do to collect a part of your down payment are: save your tax refunds or any bonus you get from your office. You can also invest in fixed deposits or mutual funds.

2. You can afford to wait even if you are sure this house is the one 
Unlike foreign cities like New York and London where the unsold inventory is rather marginal, the fact is that the number of unsold units is relatively high in Ahmedabad. So do not rush to seal the deal. Wait see if you can get a good discount deal from the developer. Sometimes, all it takes is a little coaxing in a charismatic manner and the builder will come around and drop the price a little. If during the time you decide to wait, you get to know of another buyer who is equally keen to buy the house you have set your sights on then it would be best to go ahead with the deal and not wait. However, this kind of scenario is rather rare.

3. Keep your emotions aside and be practical
If you happen to fall in love with a home that is beyond your budget then the best thing to do is to let it go. Yes, let it go! Do not get emotionally attached to a property you merely visit once or twice. You will have to weigh the pros and cons before you make such a huge investment. Home buying for you should be a pleasant experience and not a cumbersome one. Do proper research. See factors like how close the house is to the nearby bus stop, railway station, metro and airport. Factors like proximity to schools, market, mall, entertainment hubs etc. are vital ones.

4. Get a good real estate agent
While it will no doubt save your money if you choose to let go of an agent, it is not a practical idea. Remember that in case you opt to do all the research yourself, chances you your maiden home buying experience being hassle free will be very low. How many times will your boss grant you a half day or leave just because you want to go and have a look at property? Your real estate agent will act as your eyes, ears and legs and do all the running around on your behalf. The trick here is to make sure you don’t succumb to any pressure from the agent and ultimately make the final buying decision on your own. Your real estate agent has to be someone who has your best interests at heart and not a greedy one who is only concerned about getting his/her commission while not caring about your needs at all. You will be able to undermine this only when you spend decent time interacting with a couple of agents. Ask all of them the same questions and then see which out of them seems the most genuine.

5. Talk to your agent
Only zeroing in on a good agent is not enough. Even the best agents won’t be able to perform according to your expectations unless you actually tell then what is it exactly that you are looking for. The more specific you are, the easier their job will become. For example, 1BHK near the station is not going to get you any good results, however, 1BHK in a quiet area near Satellite and Iscon Mega Mall will. This in turn will save a lot of time and effort and make the process easy for both you as well as your agent.

6. Indulge in a little recce through the Internet
Do not leave everything on your agent. Do some research yourself in your free time. The best way to do that would be to use the Internet. Read up on the areas and localities you have set your sights on. Details like how is the traffic there, proximity to hospitals and other amenities are easy to find online. Also, you can use the Internet to read up reviews about a particular builder your agent recommends. While this would seem like a mundane task, it would be very helpful especially if something slips out of the radar of your agent.

7. Avail affordable housing schemes + home loan schemes
In Ahmedabad, you can avail of the government’s affordable housing scheme PMAY (Pradhan Mantri Awas Yojana). Through this scheme, you will be able to buy your dream home at affordable housing rates as well as get a good deal on a bank’s home loan offer. So find out which bank in the city has a special tie up with the scheme for home loan applications. Mostly, all major banks have tied up with the government under this scheme but still its best to check. Even under a normal home loan scheme, every bank offers a different rate of interest against the loan amount. It is also important to check how much monthly EMI will be deducted from your salary once the process starts. Make sure the bank you choose does not deduct your entire salary amount or does not expect a monthly EMI which is higher than your monthly earnings. You will also have to check the total number of years the bank expects you to return the loan amount.

8. Give preference to a project which has received OC
While the GST council did announce a slash in the GST amounts for under-construction residential projects to 5 percent and 1 percent (for affordable housing) from 12 percent and 8 percent respectively. You will be exempted to pay any GST if the house you choose to buy has already received an OC (occupation certificate). Especially if you have a tight budget, this would act as a boon to you.

Follow these tips and get ready to make your dream of owning a home in Ahmedabad a reality.

This is a guest post by Vipul

Friday, March 1, 2019

Looking to sell your property? Know more about Capital Gains Tax and Exemptions!

Author: Sachin Gupta | Find me on Twitter

If buying a property requires proper due-diligence to avoid unwanted hassles at a later stage, selling a property requires you to focus on Capital Gains Tax and Exemptions.

Under the Income Tax Act of 1961, Sections 45 to 55A deals with Capital Gains.

Capital Gains Tax are categorized as:

  • Short term Capital Gains (Holding period - 36 months or less)
    • A short-term capital gains/loss will be treated and taxed in the same manner as any other income/loss.
    • Short-term Capital Gains from Property sale are included in the investor's income and are taxed as per the slab rate.

  • Long term Capital Gains (Holding period - more than 36 months)

Long-term Capital Gains is computed as below:
LTCG = Full value of consideration received or accruing - (indexed cost of acquisition + indexed cost of improvement + cost of transfer + Expenditure incurred wholly and exclusively in connection with such a transfer)

Long-term capital gains are taxed at a flat rate of 20 per cent for individuals and foreign companies, and 20 per cent for domestic companies.

An example of Long Term Capital Gains Tax on Property in India:

Cost of purchasing a property in November 2008 - Rs 50 Lacs

Cost of selling the property in August 2013 - Rs 1 Crore

Inflation Index for fiscal year 2008-2009 – 582 and for fiscal year 2013-2014 - 939 (see from the attached cost inflation index chart*)

Purchase Cost after adjusting for indexation – 50 Lacs x (939/582) = Rs 80.67 Lacs

Long Term Capital Gains = 1 Crore – 80.67 Lacs = Rs 19.33 Lacs

Tax on Long Term Capital Gains = Rs 19.33 Lacs x 20% = Rs 3,86,597.90

Education Cess = 386597.90 x 3% = Rs 11597.94

Total Tax on Long Term Capital Gains = Rs 3,98,195.90

Tax exemption on Long-term Capital Gains under the following conditions:

  • If the sale relates to a property other than one residential accommodation and is reinvested in any residential property within a period of one year before or two years after the date of transfer.
  • Alternatively, such re-investment may also be in construction of a residential house within three years after the date of transfer to be eligible for claiming this benefit.
  • The house so purchased or constructed should not be transferred again within three years after the purchase or construction. Quantum of exemption will be the amount invested in the new property or the long-term capital gains, whichever is less. 


If only the capital gains (and not the total sale proceeds) is invested for a period of three years in specific Bonds of National Highways Authority of India or Rural Electrification Corporation Limited or bonds redeemable after three years issued by National Housing Bank or Small Industries Development Bank of India or NABARD, as may be specified by the Government from time to time (Section 54 EC) within a period of six months from the date of transfer of the asset.

Quantum of deduction:

If the amount of capital gains is equal to or less than the cost of the new house, the entire capital gains shall be exempt.
If the amount of the capital gains is greater than the cost of the new house, then the cost of the new house shall be allowed as an exemption.

* Cost Inflation Index chart for calculations of Long Term Capital Gains Tax in India

Cost inflation index for calculations of capital gains tax in india from Green Realtech Projects Pvt. Ltd

However, Budget 2014 has altered the definition of Capital Gains Exemption. If you own a property such as ancestral home or a bigger home, and if you sell it and buy more than one smaller apartment, then, in that case, you will be exempted from Capital Gains tax on the first apartment and you are liable to pay capital gains tax on second or third apartment.

As an example, let’s say, you own a property worth Rupees 2 crores in July 2014. And you want to sell it to buy 3 smaller apartments.
Assuming, the cost of buying this property in May 2003 was Rupees 20 Lacs.
Inflation Index for fiscal year 2003-2004 – 463 and for fiscal year 2013-2014 - 939 (see from the attached cost inflation index chart*)
Purchase Cost after adjusting for indexation – 20 Lacs x (939/463) = Rs 40.56 Lacs
Long Term Capital Gains = 2 Crore – 40.56 Lacs = Rs 1.59 crore

However, if you wish to purchase 3 apartments of 65 lacs each, then, according to Budget 2014, capital gains tax exemptions will be applicable only for one residential apartment.

In other words, your Long term capital gains will be = 2 Crore – 40.56 Lacs – 65 Lacs = 94.44 Lacs
And long term Capital Gains tax will be = 94.44 Lacs x 20% = Rs. 18.89 Lacs

However, after selling your property, you invest the amount in one bigger property worth Rupees 2 crores or more, then, you will be exempted from Capital Gains.

Until this Budget, anyone in India selling immovable property, or other long-term assets and using the money to purchase a residential house within three years of the sale was not required to pay capital gains tax (20 per cent) on the sale proceeds.

But the Finance Minister has now tweaked this section to specify that only “one residential house in India” would be eligible for the tax break, instead of “a residential house”.

Source: National Housing Bank

Have any Questions?