EMI moratorium facility can affect tax deductions on your home loan

Most of you would already know that the EMI moratorium facility offered by the Reserve Bank of India on all term loans, including credit cards, has a cost attached. You have to pay extra as the interest continues to accrue on the outstanding loan amount during the moratorium period. However, what you may not be aware of is the fact that if you opt for a moratorium on home loan EMIs, it could affect the tax deduction benefit you avail of.

The tax deduction benefit you get on the home loan principal repayment will reduce if you take the moratorium that is now available for six months (March to August). If you miss paying your EMIs, your principal repayment for the year will be lower, in turn reducing the tax deduction benefit.

However, the deduction benefit you get on interest repayment will stay intact even if you don’t pay the interest amount this year itself. In fact, if you were not exhausting the entire deduction limit of ₹2 lakh on interest repaid, the increased interest payment may help you reach that limit and claim higher tax deduction.

Impact on deduction benefit on home loan principal repayment

If you have availed of the moratorium on your home loan for six months, you won’t be paying the EMIs and, thereby, the principal amount for that period. This will bring down the tax deduction you can claim against the principal repayment during the year.

A person can claim a tax deduction of up to ₹1.5 lakh under Section 80C of the Income-tax Act against the principal repayment made during the year.

“Principal repayment on housing loan can be claimed as a deduction under Section 80C. As per the Section, the deduction can be claimed only on actual payment. Therefore, the deduction cannot be claimed on the principal outstanding during the moratorium period," said Sudhakar Sethuraman, partner, Deloitte India.

Suppose you have a home loan of ₹50 lakh with an interest rate of 8% for 20 years. If this is your first year of repayment, then your principal repayment will be ₹1,05,683 for 12 months. However, if you opt for a moratorium for six months, you would be making a principal repayment of ₹43,517, assuming the EMI payment started in April and you opt for extension in tenure and not an increase in EMI after the moratorium period is over. Your deduction benefit will also reduce by that much.

Remember that the principal amount may come down further as the interest cost gets added during the moratorium period.

Also, if you were banking on the home loan principal repayment to exhaust your ₹1.5 lakh limit under Section 80C, you will have to consider investing in other avenues.

Impact on deduction benefit on home loan interest repayment

For some borrowers, the moratorium will not impact the deduction benefit on the interest repayment of a home loan, but for a few others it may actually increase the tax break. You can claim a tax benefit of up to ₹2 lakh on the interest paid on home loan under Section 24 (b) in case of a self-occupied property.

Even though you do not need to repay the interest amount during the moratorium period, you can claim tax deduction benefit on the interest amount due during the financial year. Note that the interest due will be considered for deduction and not the amount that you actually repay.

“From a tax perspective, with respect to the interest, deduction under Section 24(b) of the Act from income from house property, is available towards the amount of any interest payable on such capital in the relevant financial year, within the prescribed limits," said Parizad Sirwalla, partner, head, global mobility services, tax, KPMG India.

If you are among those who are not able to currently exhaust the ₹2 lakh deduction limit on interest repayment, you may be able to do so, given that the interest payment will go up for the year if you opt for the moratorium.

However, remember that the interest portion constitutes a larger part of the EMI in the initial years of the loan.

In the example mentioned above, the interest cost for the first year in the loan goes up from ₹3,96,181 lakh to ₹4,10,778. But there will be no difference in the deduction benefit as you can claim a maximum ₹2 lakh in a year.

However, if you have only a few years left to repay your loan, the interest payment may be less than the ₹2 lakh limit as the principal will constitute a larger part of the EMI. In such cases, a higher interest payment will result in higher deduction benefit. In the same example, if you had only five years left for loan repayment, your annual interest amount of ₹1,52,378 would increase to ₹1,66,974 if you opted for a moratorium. The deduction benefit will also increase by that much.

“The impact on tax liability will be a function of both the interest payable for the relevant year and the principal repayment actually made for the relevant financial year subject to the overall limits allowed. Hence, the net impact of increased interest deduction and lower principal repayment will determine the net impact on the taxable income and consequently on the tax liability," said Sirwalla.

However, remember that this additional tax deduction benefit comes at the cost of higher interest payment on the loan. Also, higher the tenure left, higher will be the interest cost.

Don’t make the impact on tax deduction benefit the basis of your decision to opt for the moratorium.