The Covid-19 pandemic has drastically changed our spending habits, but EMIs and loans still exist. Imagine not paying an installment for a couple of months while you manage your finances. There is a provision to do that, known as a moratorium.
When the Reserve Bank of India (RBI) announced an EMI moratorium facility on home loans and credit card dues, every borrower was relieved. With people staying home more often and facing salary cuts, financial instability has become increasingly common. Homeowners who are still paying loan EMIs have been struggling with their added daily expenses and their EMIs. A moratorium came as a welcome step. However, experts claim that it comes at a high cost.
Judge for yourself; these are the effects of an EMI moratorium on your tax savings:
Postponed payments have different effects on different types of borrowers. Loans with a long-drawn-out tenure like a home loan will witness a much higher addition to the cost. The way lenders structure EMIs, the interest forms a bigger component of the repayment in the initial years, decreasing as the tenure progresses. Hence, missed EMIs lead to higher addition of debt.
Loss of Tax Deduction on Principal Amount
Availing a six-month moratorium on your home loan means you won’t be paying EMIs for that period. This lowers the principal repayment for the year, in turn reducing the tax deduction benefit on the principal repayment. You can claim a tax deduction of up to Rs 1.5 lakh under Section 80-C of the Income Tax Act, 1961, against principal repayment.
As this deduction can be claimed only on the actual amount paid, the deductions cannot be claimed on the principal outstanding during the moratorium period. Remember, as your principal amount comes down, your interest amount goes up.
Impact on Interest Deductions
If you own a self-occupied property, you are eligible to claim a tax benefit of up to Rs 2 lakh on the interest levied on a home loan under Section 24(b) of the Income Tax Act. In the initial phase of the home loan tenure, the interest takes up a bigger portion of your EMIs. If you have opted for a moratorium, it will lead to an increase in the annual interest component, which would, in turn, allow you to avail a higher home loan tax benefit later.
Effects on Income Tax Payable
The income tax that you are liable to pay against your home loan EMIs is decided upon by a combination of the income payable for the relevant year and the principal repayment, subject to overall permissible limits. So, by availing the moratorium, you will avail tax deductions on an increased interest component and a lower principal repayment.
It is always better to look at long-term consequences before you opt for schemes like the EMI moratorium. The benefits should surpass the costs of suspending your EMIs. As observed above, opting for a moratorium will increase the interest payable on your loan, leading to higher tax implications.
If you are considering opting for a moratorium, take a step back and make an informed decision.