Mar 10 2009

What is EMI and pre-EMI?

Posted by krishnas in Banking, Home Loans, Income Tax
50 Comment

Introduction

In this article I will be writing about the difference between EMI and pre-EMI. Most of the people heard about the EMI, not aware of the pre-EMI and the benefits involved in the pre-EMI. In this article we will look into more details about the pre-EMI and in what situation pre-EMI can be benefited your savings. I am looking to hear feedback from you after reading this article. Please post your comments about the home loans and EMI calculation at the comments section. You can subscribe to this blog here.

What is EMI?

EMI stands for Equated Monthly Installment.When you are applying for the loan, the loan amount has to be repaid in the specified number of months. That is called EMI. The EMI is calculated based on the interest rates, total loan amount and the tenure of the repayment for the entire loan. This will be decided by the bank once your loan application is got approved.

This process is very normal and everyone is aware of this term. But, there is another term pre-EMI, that is very less known to the people. In the next section we will look into that in details. Pre-EMI is one of the important fact which every buyer should know before applying for the loan when the building construction is not yet completed. After reading this article please talk to nearby banker to know more about the Pre-EMI and its advantages. The process for Pre-EMI can be different from each bank.

Home Loans and Income Tax Benefits

Top 5 Rules for Home Loans

What is pre-EMI?

Sometimes the whole money for the house is not disbursed to the builders. For example, if you are booking an apartment to a builders in Bangalore city on March 2009, the estimated completion time for the project is March 2011. You will have the option to tell the bank to not disburse the entire amount before completion of the project, and tell them to partially disburse the money.

The partial disbursement will happen like when the builder completes the first four floors for the first disbursement and the next stage of disbursement will happen after completion of the eight floors. These are the agreements between bank and builders based on bank’s decision.

money Here the pre-EMI term comes into the play. The real loan repayment will start only when the entire loan amount is disbursed to the builders. While the bank is doing the partial disbursement, you will have to pay the pre-EMI, that is only the interest accrued on the disbursed money. In our example, you will have to pay the pre-EMI for the two years when the apartment is under construction.

Tax Savings on pre-EMI

You can use the home loans for tax savings only when the construction is completed. In this case, pre-EMI is paid while the house is under construction. So, you cannot use the pre-EMI as the tax deduction source. Once the construction is completed, the total pre-EMI interest paid is shown in the five equal installments in the subsequent years.

For example, if you have paid Rs.100000 as the pre-EMI, then Rs.20000 will be shown in the next five years as tax deduction. Note that pre-EMI is only the interest paid during the period. If you have paid any principal amount, that is not eligible for the tax deduction. That is lost for ever. Please consult your tax consultant carefully before taking any important decision.

Summary

In this article have explained about what is EMI and pre-EMI in the detailed manner. This will clear all your doubts about the pre-EMI and how to use the pre-EMI amount for the tax deduction. I am happy to answer all your questions regarding the home loans and tax savings. If you have any queries, please post it in the comments section below. I will answer your queries. Thanks for reading this article!!!

You can subscribe to our future articles here.

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TAGS: bangalore builders, Banks, emi, Home Loans, Income Tax, pre-emi, section 24b, section 80c, tax deduction, tax planning, tax savings

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Surendra said:

Pre-EMI was unknown to me; this article gave clear picture of what Pre-EMI is.

March 30th, 2009 at 8:59 pm
krishnas said:

Thank you surendar…you can subscribe to our future articles here:
http://www.thinkplaninvest.com/subscribe/

I will be posting many interesting stuff related to home loans and investment plans. enjoy reading !!!!

March 30th, 2009 at 9:03 pm
sreekumar said:

Pre-EMI was a mistery until I read this artlcle.

thanks

April 30th, 2009 at 11:10 am
Vikram said:

The limit of the principal paid is Rs 100000. So if your other investments (insurance, PF, PPF etc) are more than that there is no rebate on principal payment. Pre-EMI and EMI will have no difference in income tax rebate if your tax saving investment/insurance exceeds Rs 1 lakh In-fact pre-EMI will be additional cost. If your total pre-EMI is more than tax saving on it(which is the case most of the time) then better to go for EMI from the beginning. Many bank offer EMI from the time of first disbursement even in case of partial disbursement.

May 25th, 2009 at 10:20 pm
Vikram said:

Infect, the interpretation that the income tax deduction on principal amount paid during the construction is also appear to be wrong. Following like gives the explanation
http://www.taxworry.com/2007/05/is-completion-of-construction-necessary.html

Ss if this is true then there is no advantage in paying pre-EMI vs. EMI.

May 25th, 2009 at 10:33 pm
Biru Gupta said:

A clarification is required…

Does the total interest deduction for EMI + Pre-EMI limited to Rs 150000 under the income tax act?

There seems to be lot of confusion around this with many people claiming income tax deduction on Pre-EMI over & above Rs 150000

August 7th, 2009 at 9:34 am
krishnas said:

HI Biru,

If the property is let-out, then you can claim more than 150000 from the tax. If it is self occupied the limit is Rs.150000.

Thanks,
Krishna

August 7th, 2009 at 10:00 pm
krishnas said:

HI Vikram,

The Rs.100000 is under section 80c. If you have the interest payment on home loans, that can be claimed under section 24b of Rs.150000. The source you quoted is wrong, I have referred many resources that the principal paid while construction can not be claimed.

Thanks,
Krishna

August 7th, 2009 at 10:13 pm
Vishal said:

Hi Krishna,

Thanks for the clarity. Pls tell us when will the actual EMI start? Will it start after the construction is completed or it will start the monent bank start dispursing the money to bank?

Thanks

Vishal.

September 9th, 2009 at 2:44 am
krishnas said:

Hello Vishal,

The actual EMI will start after the final disbursement of the loan. That means if the entire amount is disbursed to the builder, then bank will start collect the EMI.

Thanks,
Krishna

September 9th, 2009 at 7:06 am
Vishal said:

Thanks Krishna. This was useful.

Pls also throw some light on what could be the approximate rate per SQFT in E-City, Hosur Road in a project like AJMERA INFINITY?

September 9th, 2009 at 7:16 am
krishnas said:

Hello Vishal,

It seems the rate is around Rs.2200-Rs.2500. I got it from this site :
http://www.allcheckdeals.com/project-ajmera-infinity-electroniccity-bangalore.php

Also check it here:
http://www.ajmera.com/sectors/realestate/infinity/index.asp

What is the exact location of this property? Is it located in ECity phase 1 or 2?

About Ajmera Property:
Ajmera Group brings a new residential project INFINITY. This residential township is of 18 acres which comprises of 1060 apartments. The project consists of 17 towers located at Electronic City, Off Hosur road. Ajmera Infinity offers fashionable 2, 3 and 4 BHK apartments with the option of terrace in Sky Apartments and excellent amenities such as club house, gymnasium, landscaped garden and lots more to enjoy.

Thanks,
Krishna

September 9th, 2009 at 7:26 am
Vishal said:

Thanks Krishna.

Its in Phase 1. Is Rs. 2600.00 per sqft good rate?

Vishal.

September 9th, 2009 at 10:05 am
krishnas said:

Hello Vishal,

Yes..it is good rate. But, see the locality. If you want to buy inside city will be more.

Thanks,
Krishna

September 9th, 2009 at 6:09 pm
Vishal said:

Thanks Krishna for all the inputs.

Nice talking to you.

Vishal.

September 9th, 2009 at 9:06 pm
krishnas said:

Hello Vishal,

You are always welcome.

Thanks,
Krishna

September 9th, 2009 at 10:02 pm
Utkarsh said:

Krishna,

So if EMI starts before the construction, you have said I can’t claim principle tax exemption but can I claim exemption for the interest part?

September 10th, 2009 at 12:11 pm
Utkarsh said:

Krishna,

What is actually more beneficial – paying pre-EMI or getting it converted to EMI from day 1?

ALso I can never claim tax benefit on Interest paid during construction even if the construction completes in the same financial year?

September 10th, 2009 at 12:14 pm
krishnas said:

Hello Utkarsh,

Thank you for the comments.

1. You can claim the tax benefits for interest paid during the construction and after the construction period.

2. Principal paid during the construction period can not be claimed.

3. Even if you are paying interest while construction completed, the total amount paid will be claimed only after the construction completed in first five year (5 equal installments).

4. choosing pre-EMI will be good if you thing completion of construction will take more time. During the pre-EMI you will be repaying only the interest component for the disbursement of amount.

I hope this clears your doubts. If you have any more doubts please reply to this comment.

Thanks,
Krishna

September 10th, 2009 at 6:32 pm
Utkarsh said:

Thanks Krishna.

If I can claim tax benefit on interest portion of EMI as well why do you think Pre-EMI is better?

September 11th, 2009 at 10:40 am
krishnas said:

Hello Utkarsh,

EMI is calculated for the entire amount where you have to pay principal and interest. That will be huge. pre-EMI is only for the partial amount. Also partial disbursement forces builder to complete the construction soon and get the full money.

Thanks,
Krishna

September 11th, 2009 at 5:50 pm
Utkarsh said:

Ok. Thanks a lot Krishna

September 11th, 2009 at 8:54 pm
krishnas said:

Hello Utkarsh,

You are always welcome.

Thanks,
Krishna

September 11th, 2009 at 9:50 pm
Amarendra R N said:

Krishna,
Useful article, thanks !
May I suggest that n the article you highlight the important implications of pre-EMI :::
1. Principal : Not eleigible for tax-exemption
2. Interest : Distributed over five years after construction is completed.
Cheers !
Amarendra

September 16th, 2009 at 10:24 pm
krishnas said:

Hello Amarendra,

Thank you for the idea!!

Thanks,
Krishna

September 17th, 2009 at 8:25 am
Vinu said:

Hi Krish,
I had booked one under const. apartment.Payments will be a constrction based. Every 2 month i need to pay arond 2.5 lacs.
Initial 4-5 installments i will pay ,then i will go for loan ..
Please sugest is that a good idea ?

Is there any bank which permits to re-pay the prinipal before full dissbursments of loan or before completion of apartment.
I dont want to pay huge amount of pre- emi ..

what is the best options ?

September 20th, 2009 at 5:34 am
Anand Hariharan said:

Hi,

I am getting possession of my apartment after 18 months from now. Assuming at I opt for pre-EMI, and the amount disbursed till possession comes out to say Rs.40,00,000, I have 2 questions here: 1). When I get possession, the amount already paid in pre-EMI, will it be sbtracted from the total interest I would need to pay on the home loan?? 2). If not, then won’t I be paying more (interest for 18 months) than what I would have paid on a one time disbursement??

EMI: say 40,000 for 180 months
Pre-EMI: say 5,000-15,000 per month for 18 months and then 40,000 for 180 months

Barring the fact that I can invest the amount I save for 18 months (as I wont be paying 40,000 p/m), is there any advantage of going for Pre-EMI??

Thanks
Anand

September 25th, 2009 at 11:19 am
Murali said:

Hi – Can you please respond to Anand Hariharan’s query. I have the same question & this is un answered yet.

December 20th, 2009 at 10:18 pm
R.Krishnan said:

Hi
Can you please respond to Anand Hariharan’s query. I have the same question & this is un answered yet.

January 18th, 2010 at 4:53 am
Vikram said:

Hi R.Krishnan, Murali and Anand,

There is no advantage in paying the pre-EMI except the following
1. As no principal is paid during the construction, principal payment done over years after the possession can be claimed under 80C where limit is 1 lakh per year.
However rebate on principal paid is not significant as most of us may have other saving instruments under 80C (PF, PPF, MF, FD, Insurance, ULIP etc).

2. Your outgo for the initial part during construction will be slightly less. So you can invest that money some where.
Well that also does not appear to be a sensible option . Unless you have an instrument where you can get guaranteed returns(after tax) more than the home loan interest rate, it is a loss. Its like taking loan from bank and investing it at a lower interest rate.

I guess Krishna is assuming that if you want to start EMI during the construction then full disbursement have to be made in terms of Full upfront payment. However that is also not correct. Many banks give the option of starting EMI from the beginning even if disbursements will be done in multiple installments.

Please note I am speaking from experience. I have taken a home loan for under construction flat which will be completed in 2.5 years. I am paying EMI (calcuated over the whole loan amount) even during the construction period. By the time I get the possession of the flat, I would have paid more than 30% of the loan.

Regards,
Vikram

January 18th, 2010 at 7:05 am
abhishek kumar said:

what is pre-emi means when it is used in the vehicle finaince

January 20th, 2010 at 3:24 am
abhishek kumar said:

what is pre-emi means when it is used in the vehicle finance

January 20th, 2010 at 3:25 am
krishnas said:

Hello Vikram,

Thank you for the reply and detailed explanation. You are correct in the few points. I have written in the general assumption about the pre-EMI. It may not be suitable for some people based on their financial needs.

Before the construction is done, you can not claim the tax benefits.

Thanks,
Krishna

January 20th, 2010 at 3:36 am
Pratap Reddy said:

Dear Mr.Krishna,

Can we continue with pre-EMI for some time even after completing the construction and occupation??
Cant we claim pre-EMI Under Sec.24 (b) unless actual EMI (Principal+interest) starts?
Please advice.

Thanks,
Pratap
Bangalore

January 20th, 2010 at 10:23 am
krishnas said:

Hello Pratap,

You can not continue the pre-EMI after the construction is over. Also, you can claim the pre-EMI under section 24B. In the pre-EMI you will be paying only the interest. Not the principal. I hope this answer cleared you doubt.

Thanks,
Krishna

January 20th, 2010 at 7:30 pm
Pratap said:

Hi Mr, Krishna,

Thanks for reply.
My house construction is expected to be completed by March 2010.
Can I claim my 1/5 of pre-EMI for FY 2009-10.
Please clarify.

January 20th, 2010 at 9:03 pm
Rahul said:

HI Vikram

Need clarification on Pre EMI amount paid in EMI calculation.

Let us suppose that I have paid 10,000 as Pre EMI. My EMI calculation suggests that I need to pay a total of 1,00,000 as interest.

So would this 10,000 be deducted from the 1,00,000 that needs to be paid? If not, then am I not paying double interest?

January 26th, 2010 at 5:51 am
krishnas said:

Hello Pratap,

If the construction is completed by March 2010, you can claim the normal interest paid. But, for the previous years you have to calculate the 1/5.

Thanks,
Krishna

January 26th, 2010 at 6:01 am
krishnas said:

Hello Rahul,

No, That will not be deducted from the EMI. But, you can add in to the tax exemption for the next five years.

Thanks,
Krishna

January 26th, 2010 at 6:04 am
Ajit said:

Hi Krishna,

I have a question regarding this pre-emi.
I have taken a house construction loan last feb, year 2009 and have started paying EMIs since then. My house construction ended on 31st Jan 2010.
Should the amount be split for the next five year or can I show all the interest and principal paid this year itself??

Regards,
Ajit

February 3rd, 2010 at 8:28 am
Vidhya R said:

Hi,

Thanks for sharing a very useful article. I was unaware of Pre-EMI and your article gave an answer for it.

Thanks
Vidhya

February 4th, 2010 at 9:50 pm
krishnas said:

Hello Vidhya,

Thank you for the comments.

Thanks,
Krishna

February 5th, 2010 at 3:12 am
Swati said:

Your article is very good and clarifies the difference very well. Can you give me an idea on what are the kind of rates that banks charge on PRE-EMI ? Is it the same as that on the loan ? Further how is the pre-EMI calculated ? Say i take a loan of apprx. a crore and the property will be ready only after 3 years, how much of PRE EMI will i have to pay before starting to pay the EMI’s after 3 years ?

February 14th, 2010 at 10:24 am
Sunitha said:

Actually we took posession of the house 2 years ago and i have not claimed pre-emi so far. Can i start that now and claim tax benefit for next 5 years.

February 16th, 2010 at 6:16 am
Rajesh said:

In responce to Rahul’s query of 26th jan, u have said that total pre EMI paid can’t be deducted from the whole EMI calculations, but it can be added in the tax exemption for next five yrs.
Do you want to say that Pre EMI amount ( 1/5 in 1 yr) can be added in the tax exemption over and above the 1.5Lakhs limit?
My point is in the next five yrs I will anyway avail the tax exemption on the interest amount (My regular EMI comprises of principal + interest) I would be paying. And max limit is upto 1.5 lakhs in one yr.

February 18th, 2010 at 1:27 am
Swapnil.Rajemahadik said:

Hi,

What is the rate of interest charged to the consumer in case of partial disbursement of loan ( Bank charges pre-EMI ). . Since in my case the loan was fully disbursed after 18 months. Since due to perssonel problem i was not able to pay the EMI’s on regular basis, now the bank is threatening to recall the entire loan. I would like to know that when can bank actually do this ??

Regards
Swapnil

February 19th, 2010 at 9:48 pm
Swapnil.Rajemahadik said:

Hi,

What is the rate of interest charged to the consumer in case of partial disbursement of loan ( Bank charges pre-EMI ). . Since in my case the loan was fully disbursed after 18 months. Since due to personnel problem i was not able to pay the EMI’s on regular basis, now the bank is threatening to recall the entire loan. I would like to know that when can bank actually do this ??

Regards
Swapnil

February 19th, 2010 at 9:49 pm
TARUN said:

hi
I disbursed partialy 8 Lac on dated 17-02-2010 from my section loan ammount 14 lac. Now i want to start EMI as a section loan but BANK says i only paying EMI on dis loan Am 8 lac.
i pay cheque of interst amount 8 lac Rs 2170/-
give another post dated cheques march-10 Rs 6817/-
my Question is that how much amount i claim as TAX EX Calculation in this year?

February 21st, 2010 at 6:11 am
ARVIND said:

Could any one suggest me, Pre emi will be adjust to my emi, when loanamount i have taken will be given to builder.

I have taken a loan and cheque is ready, but its not given to builder,I am paying Pre Emi in behalf of that, let me know if that pre emi would be extra money I am giving to bank? or it will be part of my regular EMI?

February 28th, 2010 at 8:24 am
raman said:

hi,
i have taken housing loan in nov.2006, building completed and handed over in Mar.09. as per banks sanction letter i have to pay emi from Apr.08 & started paying EMI. what is pre-emi? now bank issued a notice stating that pre-emi amount– interest on loan amount paid to builder is pending, pay immediately or otherwise possession of flat will be taken. is there any rules?? like this. i have not intimated at the time of sanctioning loan that i have to pay pre-emi (interest on loan). Now what can be done if possession of flat is taken by bank?? or i have to go to court for settlement. please give reply to my email address

February 28th, 2010 at 10:40 pm

What is EMI and pre-EMI?

Introduction

What is EMI?

What is pre-EMI?

Tax Savings on pre-EMI

Summary

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What is EMI and pre-EMI?

Introduction

What is EMI?

What is pre-EMI?

Tax Savings on pre-EMI

Summary

You can subscribe to our future articles here.

File IT Returns online and get 20% discount.

Use the coupon code 'TPI' at the checkout.

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