EMI 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.
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.
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.
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.
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.