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I have a home loan of 5 lacs remaining and repaying 18000 every month but my interest outgo is very high

I have a home loan of 5 lacs remaining. I am repaying 18,000 every month. On calculation I found that I am paying 65,000 interest nearly. My age is 54 years and I am earning nearly 75,000 net per month. Now I want to know weather I can close my home loan at this stage? I will be free of 18,000 installment per month and thinking to divert the amount for Mutual Funds. Is it beneficial? I calculate that if I continue the home loan it will be cleared in 3 years. But I will be paying nearly 2 lacs of Interest for that. But may have to pay more tax I think. please advise?

Mar 14, 2016 by Sarma, Hyderabad  |   General

You have analyzed your home loan situation very well and therefore we think that the answer is quite obvious. You can claim income tax deduction on your entire payment. Your total interest payment over the next 3 years is Rs 200,000. Assuming you are in the 30% tax bracket, the tax savings on your interest payment over the next three years add up to Rs 60,000. If you close your home loan now, you lose Rs 60,000 of tax savings but you save Rs 200,000 in interest payments, a net benefit of Rs 1.4 lacs. You can invest cash freed up in interest savings in suitable investments like mutual fund and this will be beneficial to you in the long term. Therefore the answer to your question is obvious.

The only question that you should ponder is Section 80C the tax benefit you get on the principal payment in your EMIs. Based on the details shared by you, the principal payment can be a big component of the 80C savings. You can claim 80C benefit on home loan principal prepayment. However, from the following year onwards you will be losing this benefit. Therefore, in order to get 80C benefit in the future, you should ensure that cash flow freed up from your home loan EMIs is invested in schemes that gets you 80C benefits. If you want to invest in mutual funds, the Equity Linked Savings Schemes allows you to claim 80C benefit of up to Rs 1.5 lakhs. These schemes have lock in period of three years, but over a sufficient long investment horizon can give excellent returns.

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