EMI vs Pre-EMI


EMI  (Equated monthly installments) is the repayment model for any loans given for purchase of car, home , household articles etc.

Pre-EMI is slightly different from EMI and it is prevalent in the real estate market where many home seekers book flats/houses in construction.

When we purchase a house/flat outright where construction is complete using any bank or financial housing finance company’s home loan, we have to return back the loan as per EMI decided by lending institutions based on terms agreed. But in many cases, houses/flats are in onstruction and we have to pay purchase amount in installment basis based on % of completion of the house/flat. In this cases, if we take bank loan, the amount given to builder through us as home loans in phases ( till construction is completed and possession is given to us )will be treated as part of  bank full loan and repayment of interest alone is insisted by bank initially  and this repayment of interest on paid amount is called Pre-EMI. Once construction is completed and possession is given, then real EMI will start which consist of principal plus interest.

Normally if any one purchases a flat/house in construction, they are supposed to pay some token money for booking initially. Then if they prefer to take loans from banks, they have to approach it and get the proposal approved for the said flat/house. Banks will insist on 20% total cost of the home to be borne by the purchaser and balance 80%will be given by bank as home loan (if he is eligible as per bank norms) .Out of this 80%, the bank may disburse 20% of the loan before the plinth level, then 20% or more for every floor slab based on floor structure of the flats. Full 80% will be disbursed in phases once the flat/house is complete. The builder will inform the purchaser (borrower) about the completion of each phase of flat/ house so that he can demand payment by way of cheque in favor of builder from bank giving loan. In order to keep liquidity, bank will take the interest only on disbursed amount from the borrower as Pre-EMI. This Pre-EMI will stop till full amount of loan(80%) disbursed to builder after possession of flat by borrower. Then real EMI will start which consist of principal plus interest.

This distinction is important from the view point of Indian taxation.  The borrowers of home loans will get benefit from both Pre-EMI and EMI. Once the construction is completed, whatever the Pre-EMI is paid totally before possession of flat/house can be claimed in five years in five installments. For example, if pre-EMI is 2 lakhs totally (2009 Dec), then the borrower can claim tax benefit under sec.24 in the  subsequent five financial years( from 2010-11 to 2014-15) to the tune of Rs.50,000 each. i.e.  2,00,000 divided by 5.

For EMI, the principal repayment is allowed under sec.80 C upto Rs.1,00,000 and under sec. 24, interest upto 1,50,000 if the flat is self-occupied and full interest rebate if the flat is rented out. Even the parents who are not dependent and have their own income and stay in the flat/house of borrower can be treated as tenant and in this case, borrower can claim full interest as rebate u/s 24. For this, proper documentation like rental agreement is to be made so as to impress the income tax assessing officers. It is not easy to convince the tax authorities about treating parents as tenants unless proper justification with documents are produced showing parents as separate income tax assessees and have sizable income. This is one method of tax avoidance and not tax evasion.

C.R. Venkata Ramani

(AICWA)

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4 thoughts on “EMI vs Pre-EMI

  1. Very Good Article. Two clarifications required.
    1- Does this Pre-EMI apply also when we are taking home loan from banks to buy re-sale property?
    2- When we are buying -underconstruction property worth 75Lakhs all inclusive, then say completion date given by builder is 2yrs and I have taken a loan from bank for 20 yrs of Rs 40Lakhs, so if EMI is declared by bank as Rs 40000/month (approx 35000 interest and 5000 principal).Then pl. let me know the following.
    When the flat is under consruction stage, and builder asks from bank some amount say 20$ for plinth completion, etc.. then ank will keep on paying as builder demands, so during this time how much money bank will ask me to pay pre-EMI to bank (will it be 35000 or how it is calculated?). Also as per your article, for 2 yrs bank will be paying builder this pre-EMI and ONLY when construction is complete then this pre-EMI thing will be over? correct?. Then from that point onwards, how bank will charge me ie: what would be principal and what would be interest? I am not clear on this last part specially? Thanks for your time.

    1. Pre EMI does not apply to re-sale properties.

      The interest rate and EMI are determined by bank in advance for pre-EMI and post EMI. If builder defaults, it does affect this agreement. Otherwise fresh agreement is to be entered to.

      venkat

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