As per the provisions of income tax act you can claim exemption for the repayment of interest as well as principal. But there are certain limits to get exemption for interest and principal repayment. To know your tax exemption on home loan repayment you need to first understand how interest is calculated, and that’s where Quicko’s Home Loan Interest Calculator comes into the picture. Following is the illustration showing two components of your EMI i.e. interest and principal.
How does this Home Loan Calculator Work?
Praveen’s yearly income is Rs.10, 00,000. His age is 30 years. He is purchasing a house worth Rs.50, 00,000 and availed a loan for Rs.40, 00,000. Loan tenure is 15 years and interest rate is 10.5%. Following is his loan repayment/amortization schedule.
From this schedule, in our Home Loan Interest Calculator we can see that for initial years major component of EMI is interest and payment towards principal is very little. The graphical presentation of the same data shows interest as well as principal payment due after every year. The next column in the table after interest column shows your tax savings every year based on your income slab. While calculating tax benefit, growth in your income at 3.5% per annum is considered.
If we look at the total amount for interest we can see that, at current interest rate for 15 years you end up paying as much interest as your borrowing amount. If you increase the tenure, total interest payment increases.
Let’s understand how this repayment schedule is prepared in this Home Loan Interest Calculator. On your first EMI payment interest on your borrowing is calculated for one month. This interest amount is deducted from EMI. The difference is considered as your payment towards principal. So for the next month interest is calculated on your reduced principal due after last month’s payment towards principal.
One can pay more than the EMI or can pay a lump sum whenever they have excess income or saving to reduce the interest payment. The amount you pay beyond your EMIs goes towards the repayment of principal amount and it reduces interest outgo in subsequent payments.