EMI payments and tax benefits

the article explains how EMI is worked out and the effect of tax benefits available
Repayment of loans taken to buy a house is through EMIs (equated monthly instalments). EMIs are the fixed installments, which a borrower needs to pay over the tenure of the loan to repay the debt. Usually, the EMIs remain constant over the tenure of the loan. To put it in simple terms, the loan amount plus the interest for the loan tenure divided by the tenure of the loan (in months) gives you the EMI. The amount of EMI to be paid depends on the amount of loan, tenure of loan, rate of interest, and mode of calculation of interest. One of the important parameters governing the amount of EMIs is the tenure of the loan. Nowadays, you can avail loans for various tenures - upto five years, upto 10 years, upto 15 years, upto 20 years and in a few cases upto 25 years as well. If you decide to borrow early, at a younger age, you can opt for the longer tenure loans - like 15 to 25 years. This way, your monthly EMI payments would be less. Although the amount of interest paid would be higher as compared to other options, you can have the benefit of availing a loan for a longer period of time. However, if you are borrowing at the fag end of your career, say in the 50s, you may have to opt for a shorter tenure. The income of the borrower - both present as well as in the future is considered for loan eligibility. A borrower should be able to repay his EMIs without compromising drastically on his quality of living. The cash flows available after repayment of EMIs should not entail a dent in his living standards. As such, a judicious planning of cash flows is required. The shorter the tenure, lower is the interest rate - because of the reduced risk of the bank, and lower is the interest amount in absolute terms, because of the smaller tenure. However, the EMI is higher because the loan and interest are to be repaid over a lesser tenure. The primary determinant would be the capacity to pay the EMI and all other factors would fall in the secondary list. As the tenure of the loan increases, the interest rate also increases - to compensate for the increased risk element. Simultaneously, the EMI goes on reducing. A borrower should try to avail the maximum tax benefits available under the Income Tax Act. Presently, interest upto Rs 1.5 lakhs per annum paid for housing loans is deductible from the taxable income of the person. This translates into a saving of Rs 49,500 on the tax front. No other tax avenue offers a better opportunity than this, where an asset creation is partly financed by tax sops. Accordingly, a borrower should structure the housing loan amount for a tenure, so that his annual interest component paid in the near future is Rs 1.5 lakhs per annum. Of course, this would be contingent on other factors as well, like his annual income and savings potential. The longer the tenure, higher is the interest rate - because of the increased risk of the bank, and higher the interest amount in absolute terms, because of the longer tenure. However, the EMI is lower because the loan and interest are spread over a longer tenure.