There are schemes available for home loans and taxability will depend on the exact nature of scheme
The country's premier banks ICICI and Axis have stepped up the home loan game, by announcing two interesting schemes. While ICICI Bank announced the launch of a new home loan, which offers borrowers the benefit of 1 percent cashback on every EMI, Axis Bank's recently launched new home loan product promises to waive 12 EMIs. DNA Money spoke with top experts to understand the math, tax angles and fine-print that you should understand.
Why such schemes: Just to recap, ICICI Bank's scheme is available for home loans with a minimum tenure of 15 years to both residents as well as NRIs. The promised 1 percent cashback will accrue after the 36th EMI. In case of Axis Bank EMI waiver scheme, the maximum loan amount you can take is Rs 30 lakh. The minimum tenure should be 20 years and you can’t prepay before 48 months if you want EMI waiver benefit.
Sabyasachi Rath, CEO, Essel Home Loans feels that customers should understand that these schemes are more optical in nature and the effective rate of interest remains same to the customer. "For banks the cost in the long run is not substantial as a 1% cash back over a tenor of 20 to 30 years works out to 15- 20 bps additional cost to the bank. In a declining interest rate scenario where MCLR of banks are coming down because of lower cost of funds rather than passing the rate benefit in absolute interest rate, these schemes inculcate better customer behaviour," avers Rath.
These schemes are rolled out in affordable housing segment where typically the delinquency rates is high. So, these schemes will encourage customers to pay on time and effectively reduce collection costs for banks which is around 2% of portfolio. "However the banks will recover this cost from either sourcing channels or collection cost reduction," points out Rath.
Look for fine-print: The devil is in the details. In case of the Axis Bank scheme, the processing fee is up to 1% of loan amount, with a minimum amount of Rs 10,000. For a Rs 30 lakh-loan, the processing fee is a steep Rs 30,000. "The Axis Bank scheme does not offer the flexibility to change EMI cycle. Under this scheme, the EMI cycle will remain fifth of every month. Also, remember, if your repayment record is not consistent, the EMIs will not be waived," says Debashish Dutta, a financial consultant.
In case of the ICICI Bank scheme, the cashback amount will be calculated at the end of the cashback period - first cashback period is 36 months and the subsequent cashback period is 12 months. "This offer is available only to customers who are making their loan repayment through a ICICI Bank account. Also, please note that cashbacks will not be on any pre-EMI amount. The bank says that the 1% cashback benefit amount is calculated only on the EMIs paid towards the loan," points out Dutta.
Tax treatment: As these are new innovative products launched by banks, its taxation is not clearly dealt in the existing tax laws. However, there are two possibilities in both the cases and the taxability will depend on the exact nature of scheme.
In both the cases of cashback and EMI waiver, Chetan Chandak, head of tax research, H&R Block India says the bank may adjust the cash back/EMI waiver against interest on the loan and as such the interest payable by an individual for the year will be lower (as it will amount to discount on interest payable) than normal interest. This means the tax deduction automatically gets reduced and the taxpayer will have to do no further adjustment.
"If cash back/waiver is in the form of waiver of loan principal, taxman may consider it as a gift from a non relative and may attract tax if the yearly waiver exceeds Rs 50,000", he cautioned.
"But in both the above cases if the house forms part of taxpayer's business asset then the entire interest due on the housing loan will be booked as an expense in the books of account and any waiver or cash back on housing loan (will be considered as income of the business) irrespective of treatment in the bank's books," the tax expert remarked.
KNOW THE FINEPRINT
- There are schemes available for home loans and taxability will depend on the exact nature of scheme
- In case of loan-principal waiver, taxman may attract tax if yearly waiver exceeds Rs 50,000
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