By Chaitali Dutta

* I had taken a home loan of Rs 36.70 lakh in 2016. Current principal balance amount is Rs 26 lakh and my EMI constitutes 50% principal and 50% interest. I calculated income tax benefit with 30% tax slab and FD interest at 7% on the Rs 15 lakh I am planning to pre-pay. After comparing both options, I came to the conclusion of not to repay the loan now. I request your advice in this matter.

—Abhijit Kulkarni

The various angles to look at this situation for the pros and cons are:

a) For apple-to-apple comparison consider a cash-out flow in both scenarios till the longer period.

b) Keep in mind that interest rates are likely to start dipping 12 to 18 months from now.

c) The interest earned on the FD is also taxable at the marginal rate. Consider only the net yield for the calculation of the scenario.

d) The EMI which becomes free after the loan pays off, should be considered towards the monthly accumulation of the corpus.

e) The income tax savings on the interest paid has the net effect of reducing your liability cost. It does not make it zero. For example, considering a 9% interest on your home loan and factoring in the income tax benefit at 30%, your net home loan cost is 6.3%.

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Assuming only debt investments equivalent to an FD and the various points above, my suggestion would be to pay off Rs 15 lakh. The cumulative interest savings will be Rs 8.6 lakh and you will have a corpus of Rs 26.5 lakh after five years (by accumulating free EMI amount assumed at 5% post-tax growth). The only way not pre-paying the home loan will be beneficial is if you can earn a post-tax return of higher than 6.3% per annum on Rs 15 lakh.

* I took an education loan for my son to do an MBA. Now he has cleared the civil service and wants to leave the course midway. Do I have to start paying the EMI now?

—Ashok Gupta

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In case a student discontinues a particular course for which a loan is taken, the bank needs to be informed about it. Further disbursements will stop. Yes, the loan needs to be repaid back with EMI now. Speak to the bank to request for a moratorium as the repayment burden is coming on you instead of your son.

The writer is personal finance wellness expert and founder of AZUKE Finance. Send your queries to fepersonalfinance@expressindia.com