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Yogi Zone

Useful articles for your finance management by our team of experts

What is Pre-Emi in Home Loans?

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pre-emiEMI is a commonly heard term in loans. But, there is another term which is specific to home loans. It is called Pre-EMI. If you have already applied for a loan or planning to apply for one now, you should know more about this term.

Note: Compare the best rates and other loan offers before finalizing on a loan.

What is it?

As the name suggests, Pre-EMI the portion of payment you make to the loan disbursing company before the actual EMI starts. This involves only the interest part and principal part is not paid here. The interest is paid up to the time of possession of the property. This is different from EMI in various aspects such as tenure, interest calculation and taxation.

Tenure

Usually, banks disburse loan and EMI’s start from the start/end of the disbursement month. The tenure for such cases would be the tenure of the loan as stated by the bank. However, tenure in the case of Pre-EMI varies with the possession date. If the possession is given within 2 years, the total tenure of the loan would be actual loan tenure plus 2 years. As the project is delayed, the tenure keeps increasing accordingly and you have to keep paying interest.

Interest calculation

In case of EMI’s, interest calculation is done on the total loan amount agreed upon. In case of Pre-EMI’s, interest is calculated based on the amount disbursed to you. Interest rate would remain the same. If only Rs.2 lakh has been disbursed to you before possession, you will have to pay interest only for that amount.

Tax benefits

As you know, EMI for home loan gives tax benefits in the form of principal under section 80C and interest under section 24. You can claim exemption for the year in which they have been paid to the lender. However, in the case of Pre-EMI, you cannot claim the entire amount of interest paid in the same year of payment to the loan company. You can only claim it after receiving possession of the property. Also, this can claimed in 5 equal parts in 5 consecutive years after possession.

Which is better?

At the first instance, you may feel that EMI is a better option than Pre-EMI since you are paying interest even before the actual EMI starts. Do consider the time value of money too. In the case of EMI, you will be paying interest plus principal from the beginning. For Pre-EMI, you will have time left to start off paying the actual EMI. You will only be paying for the part amounts disbursed. In the meantime, you can actually save & invest your money from now for part payment of your loan later. This will reduce the overall interest burden for you.

Along with this, you may also look at your paying capacity before deciding upon anything. There might be chances that your income might increase at a higher rate than the interest rate of the bank. In such cases too, Pre-EMI is a better option. On the other hand, if the project gets delayed for too long, you may be in trouble with Pre-EMI.

  • Saideep

    Does that mean, even if I had only taken 1 Lakh as disbursement till date and there is rest of the amount of 9 Lakh and if I opt for EMI, I would be paying completely for the 10Lakhs or only for the disbursed amount?

    • Av Suresh

      Yes, Saideep. You will start paying for the entire amount in case of EMI. In case of Pre-EMI, you need to pay for the disbursed amount only.

  • vibhor

    I don’t think Pre-EMI is good option except in case of project delay. With loan amount of 25 lakh, your EMI will be more than 25k considering the ROI @10.10%. In case of pre-EMI, you will have to pay 28k or more but if you select only EMI option, you will be paying around 26k-27k. So, i find EMI option better. Correct me if i am wrong.

    • Av Suresh

      Vibhor, you are right in this case. However, as stated in the article you also have to consider time value of money in both the cases. Also, if you are planning to sell off the property immediately after possession, Pre-EMI should be preferred.

  • hardik

    My question is bit out of topic. I’m paying EMI (Principal + interest) for my under construction flat and possession is yet to be given by builder. my question is: Can i claim tax benefit for Principal or Interest or both pad for my under construction flat?

    • Av Suresh

      Hardik, you can claim only the interest part of the emi paid for under construction flat. You can claim it in 5 equal installments over 5 consequent years after possession.

      • hardik

        Av Suresh, Thanks. Does it mean, I do NOT have any tax advantage for the current financial year though I’m paying Principal and Interest? Pl clarify. Because If so, there will be big loss for ppl like me in the current financial year.

        • Av Suresh

          Yes, Hardik. That’s how the rule has been made. You can only claim exemption after possession.

          • hardik

            Av Suresh, Thank you for your guidance.

          • Av Suresh

            You are welcome, Hardik.

  • msharma

    I and my husband are co-owner of house for which we got the possession.

    My husband is claiming 100% tax benefits on EMIs. Can I claim tax benefits on Pre-EMI. [20% for 5 five years]

    • Yogi Cfp

      Yes, you can claim benefit on pre-emi in 5 equal installments over 5 consecutive years.

      • msharma

        Thanks for quick reply

  • Ignatius

    I have just booked a new under construction property /flat. I have been sanctioned a loan of 25lacs. If I avail payment of pre EMI what will be the benefit over EMI, with respect to tax

    • Av Suresh

      Not much difference. For Pre-EMI, tax benefits cannot be claimed in the same year when interest is paid to the bank. You can claim it only in 5 equal parts after construction period is complete. However, for Emi, you can claim in the same year.

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