Full EMI repayment of a home loan is the payment of principal as well as interest. This payment begins once the construction of the house/ building is completed. Some banks also permit commencement of full EMI payment while the loan amount is being disbursed in stages. If you have opted for the pre-EMI payment option, EMI payment will commence once the pre-EMI phase ends. By paying the full EMI, the interest is repaid and the outstanding loan amount will be reduced during the loan period.
Pre-EMI is the payment of interest applicable on the loan only. This amount is paid in the period during which the house/ building is being constructed. It ends once the construction is completed. Pre-EMI amount is lesser than full EMI amount since only the interest portion is paid out and the principal loan amount remains intact. The pre-EMI period is not part of the loan tenure.
Example: Person A opts for a home loan of Rs. 15, 00,000 over a period of 20 years. The construction of his house will be completed in 3 years, during which he wishes to pay pre-EMI. After this 3 years is competed and his pre-EMI payment ends, EMI repayment period commences. Thus, the total loan tenure would be 3 years (pre-EMI period) + 20 years (loan tenure) = 23 years.
This example is for illustration purposes only.
Pre-EMI is Ideal for:
- Those who wish to same money during the pre-EMI period and invest it in such a way that they get good returns on the amount. The opportunity cost of the money that would have to be paid as full EMI and that which could be accumulated and invested in a good savings scheme will help determine which repayment option to choose. For example, Consider the full EMI payment is Rs. 25,000 out of which the interest contribution is Rs. 5,000. By choosing to pay pre-EMI only, i.e., Rs. 5000 interest only, the borrower can invest the remaining Rs. 20,000 elsewhere and earn consistent returns. This can be accrued to pay the EMI at a later stage.
- The pre-EMI option is also ideal for property investors who wish to sell the property once construction is completed.
- Those who are waiting for a change in income capacity or cannot afford to pay full EMI at the moment, will find pre-EMI payment to be the best option.
Full EMI is Ideal for:
- Those who wish to pay the home loan by the time of possession of property should opt for full EMI repayment of the home loan.
- This option is also ideal for those who face the risk of delay in construction. This would mean payment of pre-EMI for a longer period, which makes the total cost of availing the loan higher.
Tax Benefits :
Both pre-EMI and full EMI repayment method for home loan enjoy the same tax benefits. Tax deduction is not applicable during the under construction phase. However, once the borrower obtains the possession certificate, the amount paid as interest (in pre-EMI or full EMI option) will be aggregated and is considered for tax deduction in 5 equal installments.
Conditions for choosing Full-EMI option
Below mentioned are the scenarios wherein it is preferable to choose the Full-EMI option for your loan repayment:
- The property has been purchased as a long-term investment.
- The customer wishes to repay the debt at the earliest.
- The borrower wants to enjoy tax benefits as soon as the repayment tenure starts.
- The applicant foresees a delay in the construction of the project.
- There isn’t any better option for the investment of funds.
When should you choose Pre-EMI option?
See the list mentioned below in order to learn when a borrower should opt for the Pre-EMI option while repaying his or her loan:
- The individual has less money to pay the rent as well as the loan repayment EMI.
- The borrower has plans to sell the property in the first few years after construction.
- The applicant wishes to sell the property right after the construction is completed.
- The customer is facing a financial crisis and has an urgent credit requirement.
- The individual wants to further invest the difference amount between Pre-EMI and Full-EMI in order to gain higher returns.
Tax benefits of Pre-EMI vs Full-EMI
See an example mentioned below concerning a self-occupied property to understand the difference between Pre-EMI and Full-EMI better.
| Year | Pre-EMI Option | Full-EMI Option | ||
|---|---|---|---|---|
| Principal repayment amount | Interest repayment amount | Principal repayment amount | Interest repayment amount | |
| 1 | - | Rs.100,000 | Rs.502,892 | Rs.76,121 |
| 2 | - | Rs.300,000 | Rs.346,126 | Rs.232,887 |
| 3 | Rs.82,737 | Rs.496,276 | Rs.171,640 | Rs.407,373 |
| 4 | Rs.91,401 | Rs.487,612 | Rs.189,613 | Rs.389,400 |
| 5 | Rs.100,971 | Rs.478,042 | Rs.209,468 | Rs.369,545 |
| 6 | Rs.111,544 | Rs.467,469 | Rs.231,402 | Rs.347,611 |
| 7 | Rs.123,225 | Rs.455,788 | Rs.255,633 | Rs.323,380 |
| 8 | Rs.136,128 | Rs.442,885 | Rs.282,401 | Rs.296,612 |
| 9 | Rs.150,382 | Rs.428,631 | Rs.311,972 | Rs.267,041 |
| 10 | Rs.166,129 | Rs.412,884 | Rs.344,640 | Rs.234,373 |
| 11 | Rs.183,525 | Rs.395,488 | Rs.380,728 | Rs.198,285 |
| 12 | Rs.202,742 | Rs.376,270 | Rs.420,595 | Rs.158,418 |
| 13 | Rs.223,972 | Rs.355,041 | Rs.464,637 | Rs.114,376 |
| 14 | Rs.247,425 | Rs.331,588 | Rs.513,291 | Rs.65,722 |
| 15 | Rs.273,334 | Rs.305,679 | Rs.374,960 | Rs.14,318 |
| 16 | Rs.301,955 | Rs.277,058 | - | - |
| 17 | Rs.333,574 | Rs.245,439 | - | - |
| 18 | Rs.368,504 | Rs.210,509 | - | - |
| 19 | Rs.407,091 | Rs.171,922 | - | - |
| 20 | Rs.449,718 | Rs.129,295 | - | - |
| 21 | Rs.496,810 | Rs.82,203 | - | - |
| 22 | Rs.548,832 | Rs.30,181 | - | - |
In the above example, the following points should be noted:
- There is no tax benefit for the Pre-EMI option during the first 2 years.
- The principal amount of Pre-EMI is always less than that of in the Full-EMI.
- There is no additional benefit to repayment of the principal amount or interest payment before possession in case of Pre-EMI.
- An interest amount of more than Rs.2 lakh is paid between 3 and 7 years in both the cases.
- The loan is paid back much faster through the Full-EMI option compared to the Pre-EMI option.
In conclusion, it can be said that there aren’t many tax benefits to paying back the interest during the pre-construction through the Pre-EMI option as compared to the Full-EMI option.
Difference between Full-EMI and Pre-EMI
- Loan disbursal: The Full-EMI option is usually selected when the loan amount is disbursed one time. On the other hand, the Pre-EMI option is generally chosen when the total amount of loan is disbursed in parts.
- Interest rate calculation: The interest of Pre-EMI is compounded based on the loan amount disbursed to the builder while the interest for the Full-EMI option is calculated based on the principal loan amount.
- Loan repayment tenure: Since the monthly installments under Full-EMI contain a larger portion of the principal amount, the debt is repaid sooner by choosing this option compared to the Pre-EMI option.
- EMI payments: The monthly payments begin since the start of the construction in Pre-EMI option. Whereas, the EMIs for the Full-EMI option starts only after the completion and possession of the property.
- Impact on the components of loan: With the payment of each monthly installment using the Full-EMI option, the principal amount and tenure get reduced. On the other hand, the EMIs paid using the Pre-EMI option do not have any impact on the principal amount, loan repayment tenure, or rate of interest.
- Resale of property: With Pre-EMI, the borrower will be able to sell the property right after of within a few years of its completion. On the other hand, individuals who have availed the Full-EMI option will not be able to sell the concerned property for a certain period of time.
- Impact on finances: Paying an EMI through Pre-EMI can be easier on the pocket owing to the fact that the borrower has to only pay the interest during the pre-construction period while this might not be the case with the Full-EMI option.
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