Impact of EMI moratorium on home loan tax deductions

[ecis2016.org] The benefits that a borrower would get, or the losses he would suffer, on applying for the EMI moratorium, would depend on where exactly he stands in the loan tenure

Salaried borrowers who have opted for the Reserve Bank of India’s (RBI’s) home loan EMI moratorium, because of the current financial stress, will also see some changes as far as their tax deductions are concerned. Examined in this article, is how the six-month EMI moratorium would impact the tax benefits that a home buyer can avail of under Section 80C and Section 24(b) of the Income Tax (IT) Act.

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The kind of benefits a borrower would get, or the losses he would suffer on applying for the EMI moratorium, would depend on where exactly he stands in the loan tenure. This has to do with the fact that the benefits offered under the two sections of the law, act quite differently. Using a front-loading method, banks make you pay a large part of the interest component of your home loan during the beginning years of your home loan tenure. After that period, the interest portion reduces while the contribution towards the principal repayment rises. This is why the impact would be different, depending on where exactly in the repayment tenure cycle you stand.

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Impact of moratorium on tax benefit on home loan principal

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An individual can claim a tax deduction of up to Rs 1 .50 lakhs per annum under Section 80C, against various investments, including home loan principal payment. However, deductions under Section 80C are offered on the payment basis. This means, benefits can only be claimed on the actual amount that the borrowers pay in a year. Now, if you have opted for the EMI moratorium, you are not paying the home loan principal for that period. The fact that you would pay that amount later, will not be factored in at the time of tax calculation, since no ‘actual’ towards the principal has been made during the moratorium. Simply put, the deduction cannot be claimed on the principal outstanding during the moratorium period.

Suppose you took a home loan of Rs 40 lakhs for a 20-year period at 8% in April 2019. For the financial year 2020-21, your principal repayment will be Rs 89,756.81 for 12 months. Now, if you opt for the six-month moratorium, you would actually be paying only Rs 44,878 as the home loan principal amount. On the other hand, as against your total interest liability of Rs 3,11,734.39 (over Rs 3.11 lakhs), you would be paying Rs 1,55,867 as the interest component.

To exhaust the Rs 1.50-lakh limit under Section 80C, you will have to rely on other instruments of investment, since only Rs 44,878 would actually be paid in the year. This should not be a problem for a borrower, who has invested in provident fund, public provident fund and life insurance policies. However, even in these cases, the borrower will have to show proofs of actual payment. To know your provident fund balance online, you could use your UAN login. You can also check your UAN passbook online using this login.

Impact of the moratorium on tax benefit on home loan interest

Unlike Section 80C, Section 24(b) allows tax deductions on the liability and not the actual payment. Deductions on home loans under Section 24 (B) are offered on an accrual basis – interest is calculated for each year separately and the rebate can be claimed, even if no actual payment is made.

This way, borrowers who have availed of the six-month EMI moratorium scheme, could simply get an interest certificate from their bank and submit it as a proof with their employers.

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In the example mentioned above, the borrower would be able to claim deduction of the entire Rs 2-lakh limit, as his interest component is Rs 3.11 lakhs for the entire year, even though he would be paying Rs 1, 55,867 as the interest component, supposing he has applied for a longer tenure and not a higher EMI once the EMIs restart.

EMI liability after the moratorium period

Note that the EMIs that you do not pay for the six-month period will be included in your overall home loan principal amount. This means that in the above example, Rs 2,00,742 will be added to the outstanding principal amount of Rs 3,937,226, as Rs 62,773.83 has already been paid and your new principal amount would be Rs 4,137,968. From September 1, 2020, the bank would charge the interest on that amount. In our example, however, the tax benefit would be limited to only Rs 2 lakhs, even though the entire interest payment for the year would increase to Rs 3,22,487.

Read all about moratorium

Those who were not able to exhaust the limit under Section 24(b) earlier, would be able to do so if they apply for the moratorium, as the interest component would increase significantly. This would be true in cases where the borrower has serviced a large portion of the loan and only has a few years left to repay it fully. In these cases, the principal amount constitutes the larger part towards the EMI outgo. In our example, for instance, the borrower would be paying Rs 3,07,056 as the principal amount in the year 2035 as against the interest component of Rs 1,08,282.

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