Borrowers switch banks when offered additional loan, my article in Business Standard

Business_Standerd_25-08-2014

Do customers really know how much interest banks are charging on their home loans? Though it is likely that customers know how much EMI they shell out as it is reflected in their monthly bank statement. They remain blissfully unaware even if banks has raised interest rate in the mean time as banks increase the tenure to iron out the impact of increased EMI. Even if they are in the know, they are bitten by the bug ‘inertia’ to make a switch.

In case one decides, it doesn’t always hit the customer how much saving he will make.

But what if one decides to make a switch, what choices banks can offer him so that he is benefited and also motivates him to make that move.

My article published today in Business Standard discusses the scenario.

Removal of pre-payment penalty not enough for borrowers

The Tribune_25-08-2014

Some time ago RBI had directed banks for not charging any pre-payment penalty on all floating rate loans be it car loan, LAP or business loan. These rates are quite high
and hit the Indian borrowers hard when they want to switch to low cost lender. So what is this prepayment penalty? Pre-payment penalty is actually a financial penalty that discourages consumers from shifting their loan.

Besides charges, the process of shifting the home loan is also quite cumbersome. Here the new lender has to make payment to the existing lender without having security
of property papers. All this and more.

Read my article in today’s ( August 25) The Tribune to know why this kind of inter-se document transfer mechanism is important to enable borrowers to get fair deal.

The Right Strategy to contentment, My Plan in Outlook Money by Harsh Roongta

July 2014-My Plan-Outlookmoney

Satputes are young and have many dreams to fulfill.

Harsh Roongta makes their financial plan covering all aspects of their investments, insurance and loans and suggests them that

they should not over stretch themselves. Read on the entire plan published in Outlook Money.

Primary Observations

Good Moves;

  • Seeking Professional advice.
  • Buying Term Plans for Life Cover.
  • Investing in equity via monthly SIP.

Bad Ones:

  • High allocation to real estate
  • Buying Car on loan
  • No Planned investment for future goals.

Primary Recommendations:

  • Sale your under construction home at Mira Road and repay the existing loans as recommended. Invest balance amount for education goal.
  • Buy online term plans, Top Up Health Insurance Plan and Disability insurance as recommended.
  • Increase monthly SIP and invest in the funds as recommended.

Don’t penalise buyers for construction delays by builders

1Harsh Roongta
Don’t penalise buyers for construction delays by builders
Harsh Roongta, CEO, ApnaPaisa

My friend Ajay called me and excitedly told me that, at long last, the under-construction flat that he had bought in 2007 and delivery of which was promised in 2010 had, at long last, finally been delivered last week. He was extremely happy that he would be able to move into his dream home. What had added to his happiness was the fact that he would be able to claim the enhanced interest deduction of Rs. 2, 00,000 for the year as well.

Here I had to unfortunately puncture his additional happiness. I told him that given his facts the maximum deduction of interest that he was eligible for was only Rs. 30,000 and not the new limit of Rs. 2, 00,000 that he was expecting. He could not believe it till I explained to him that since he had taken the first loan disbursement in the financial year ending March 31, 2008 and the house was not completed by March 31, 2011, the increased limit of Rs. 2, 00,000 was not applicable to him and the maximum deduction in his case would be limited to Rs. 30,000. He cross checked the facts with his tax advisor who confirmed what I had told him. Ajay was grumpy and wondered why he, the home buyer, was being penalised for a delay that was not his fault in the first place and because of which he had already suffered huge losses and now to add insult to injury his tax deduction was also being severely curtailed.

That set me wondering. Why was this seemingly unfair provision put in the Income tax act in the first place? The limit for deduction of interest payable on loan taken to acquire a self-occupied property was Rs. 30,000 without any other conditionality till 1999. This restriction for completing construction was first put into place by the finance bill 1999 which raised the limit for deduction of interest on loan taken for self-occupied property from Rs. 30,000 to Rs. 75,000 but only for properties completed before March 31, 2001. This increase in limit was subsequently enhanced to Rs. 1, 00,000, Rs. 1, 50,000 and finally to Rs 2, 00,000 by the latest finance bill 2014 with the restriction on construction period being adjusted suitably from time to time. The limit for unconditional deduction has been kept at Rs. 30,000 all along. I studied the explanatory memorandum to each of the finance bills that put in the construction period restrictions but none of them mentioned any specific reasons for putting in these restrictions.

The only speculation I can make for this seemingly unfair restriction was that till just a few decades ago self-construction of houses was the norm rather than the exception (that it is today) and the tax authorities wanted to encourage people to build their house quickly rather than buy a plot of land and keep it vacant to speculate on land prices. I don’t think they envisaged that more than 70% of home loans would be given out for acquiring under construction properties from independent developers. At that time it may have been difficult for them to envisage that delays would be endemic to the whole building process mostly because of delay in approvals from the government authorities themselves as well as fund shortage for the developers. At that time nobody would have thought that a construction period of 3 to 4 years would be grossly inadequate. As a result of this lack of understanding by tax authorities, the home buyers are hit by a double whammy. They have to pay pre-EMI interest during the construction period for long periods and this Pre-EMI interest enjoys no deduction at that time and then the total limit for deduction is restricted to Rs. 30,000 p.a. if the construction period exceeds 4 years which again has unfortunately has become the norm rather than the exception nowadays.

The only reason it has not become a big issue till now is that tax returns do not capture information about construction periods, hence most home buyers are going ahead and claiming the enhanced deduction blissfully unaware that they will be liable for penal interest should their income tax returns be opened for detailed scrutiny. Luckily for them most tax returns are nowadays accepted as filed and even when opened for scrutiny, most assessing officers are equally unaware of this restrictive provision.

But this “happy” state of affairs cannot last for long given the huge collection targets that the tax department has. It would be in the fitness of things that the tax law is amended to remove this unnecessary restriction on construction period or at least be appropriately amended to make such restrictions apply only when the tax payer is doing self-construction. Till that is done the least that all home buyers like Ajay can do is be aware of these tax provisions and make sure they buy properties that are either ready to move in or at least at a stage such that the completion will not exceed the 3 year period.

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