Diwali, the festival of lights, is a time of celebration and togetherness, but it also presents a unique financial opportunity in the form of Diwali bonuses. Rather than splurging on fleeting luxuries, consider channelling your Diwali bonus toward a more substantial investment – prepaying your home loan. We will explore the advantages of utilizing your Diwali bonus for home loan prepayment, along with a comprehensive explanation of tax deduction sections, interest rates, and how your interest rate percentage plays a pivotal role in this financial decision.
The Power of Home Loan Prepayment
Before delving into the intricacies of tax sections and interest rates, it is essential to understand the fundamentals of home loan prepayment and the associated benefits:
Interest Savings
Home loan prepayment entails making extra payments toward the principal amount of your loan. By reducing your outstanding principal balance, you decrease the interest component of your monthly instalments (EMIs). The more you prepay, the more you save on interest, paving the way to a quicker path to financial freedom.
Reduced Loan Tenure
Prepaying your home loan allows you to shorten the loan tenure. A shorter tenure not only means faster debt clearance but also a significant reduction in overall interest costs.
Financial Security
Becoming debt-free by prepaying your home loan provides financial security. Free from EMI obligations, you have greater financial flexibility to divert your funds toward investments, savings, and other financial goals.
Improved Credit Score
Timely home loan repayments and prepayments positively influence your credit history and bolster your credit score. A robust credit score opens doors to better financial opportunities, such as securing loans at lower interest rates and accessing improved credit card offers.
Understanding Tax Deduction Sections
To maximize your financial benefits when using your Diwali bonus for home loan prepayment, it is vital to understand various tax deduction sections:
Section 24 – Tax Benefit on Home Loan Interest:
Deduction on Interest Payment: Section 24(b) of the Income Tax Act, 1961, allows you to claim a tax deduction on the interest paid for your home loan. For a self-occupied property, the maximum deduction limit is ₹2 lakh per annum. However, if the property is not self-occupied, there is no upper limit on the interest deduction.
Conditions for Deduction: To qualify for this benefit, your property’s construction should be complete, and you must have taken possession of it. The loan amount should have been used for purchasing or constructing the property, and the construction should be finished within five years from the end of the financial year in which the loan was taken.
Section 80 – Tax Benefit on Home Loan Principal Repayment:
Section 80C: Under section 80(c) of the Income Tax Act, tax deduction of a maximum amount of up to Rs 1.5 lakh can be availed per financial year on the principal repayment portion of the EMI. This deduction can only be availed after the construction of the residential house property is complete.
Importance of Interest Rates
The interest rate on your home loan is a critical factor in determining the overall cost of your loan. Even slight fluctuations in the interest rate can significantly affect your EMI and the total interest you pay over the loan tenure. The interest rate charged varies from lender to lender and can depend on the type of home loan (fixed or floating rate).
Currently, home loan interest rates in India typically range from 6.5% to 8.5% (as of my knowledge cutoff date in September 2022). However, these rates can fluctuate based on market conditions and lending policies. A lower interest rate can lead to lower EMIs and substantial interest savings over the long term.
Also Read: Festive Delight: Transform your home with the latest festive season makeover trends
Using Your Diwali Bonus for Home Loan Prepayment
Now that you’re well-informed about the potential benefits of home loan prepayment, tax-saving sections, and the impact of interest rates, here’s how to effectively use your Diwali bonus to become debt-free sooner:
Financial Assessment: Start by evaluating your financial situation. Consider your Diwali bonus alongside other financial responsibilities and goals. It’s essential to strike a balance between debt reduction and other critical expenditures.
Calculate the Prepayment Amount: Collaborate with your lender to calculate the amount you can prepay. Understand how this prepayment affects your interest outflow and loan tenure. Decide the proportion of your Diwali bonus that you want to allocate to home loan prepayment.
Optimize Tax Benefits: To maximize your tax benefits, strategically plan your home loan prepayment in a way that allows you to utilize both Section 24 and Section 80 for the full range of deductions. Ensure you meet the specified conditions under these sections.
Maintain Documentation: Proper documentation of your home loan prepayment, including interest and principal components, is crucial for claiming deductions during tax filing.
Interest Rate Negotiation: If you have an existing home loan, consider negotiating with your lender for a lower interest rate. A reduction in your interest rate can lead to more substantial interest savings over the loan tenure.
Conclusion
Diwali, a festival that signifies the triumph of light over darkness, can also be an occasion for your financial victory. Your Diwali bonus is not just a temporary gift; it’s an opportunity to take control of your financial future and expedite your journey towards a debt-free life. By embracing the power of home loan prepayment, optimizing tax benefits, being mindful of interest rates, and effectively utilizing your Diwali bonus, you can celebrate the festival of lights with the added joy of financial freedom.
This Diwali, make a commitment to financial prudence and use your Diwali bonus as a beacon guiding you toward a brighter, debt-free future. By seizing this opportunity, you can illuminate your financial path, freeing yourself from the shackles of debt and marching confidently towards financial independence.
This article has been written by CA Ruchika Bhagat, MD, Neeraj Bhagat & Co. Views expressed are personal