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What is Home Loan Insurance? Why is it Important?

 

Life is not certain and also doesn’t come with any guarantee cards. Instances like partial or complete disability, or death of the sole bread earner can result in huge financial trouble for the family. And, if there is a home loan repayment running, the situation can get really bad.

 

Therefore, to avoid such a situation, to protect your near and dear ones from financial trouble due to home loan repayments in the event of the unfortunate demise of the primary borrower, it is advised to take insurance for a home loan. It’s very important for maintaining the financial stability of your family.

Let’s have a detailed view of the topic.

 

What is Home Loan Insurance?

 

Home loan insurance is a type of life insurance cover, where in the event of the death of the borrower, the home loan insurer will settle the entire outstanding home loan amount with the lender. And the borrower’s family gets complete ownership of the house property.

 

 

How Do I Avail Home Loan Insurance?

 

A home loan insurance policy is taken while procuring the home loan. Usually, the home loan insurance cover comes bundled with the home loan package, where the premium amount is deducted from the total home loan amount or the lender may ask you to pay the premium.

 

As home loan insurance cover is not mandatory, meaning, neither RBI nor IRDAI has any rules that force the borrower to buy the home loan cover. You can buy the home loan insurance cover from your preferred insurer.

 

However, it is better to buy one from your lender, if there is no marginal difference in premium rates to reduce the complexities in the home loan approval process.

 

How Does Home Loan Insurance Work?

 

Home loan insurance plans are a type of term plan, where the borrower is covered under this insurance plan until the repayment is complete. Once the outstanding home loan is repaid entirely, the home loan insurance tenure expires.

 

If the borrower dies during the repayment tenure, and a large part of the home loan amount is still needed to be repaid, the family can claim the home loan insurance cover to settle the entire outstanding home loan amount. This ensures the family will not have to repay the home loan and gets full ownership of the house property.

 

In absence of home loan insurance cover, the lender will seize the house to recover the losses, even in the case of unfortunate events. Please note that the insurance does not provide cover against situations such as job loss or disability due to accidents.

 

Lenders such as Grihashakti offer customers plans from top insurance providers which can go above and beyond basic home loan insurance coverage. We allow our customers also to purchase useful policies such as health insurance, accidental health cover, and more.

 

How Home Loan Insurance Premium is Paid?

 

Most home loan insurance has a one-time lump sum premium payment option, which is either deducted from the approved home loan amount or the lender asks to pay the additional premium amount.

 

For example, if the home loan amount is Rs 50 lakh for 15 years tenure, and the premium amount is Rs 1 lakh, the borrower has the option to take either Rs 51 lakh as a home loan or deduct the premium amount from the home loan amount.

 

However, it is cost-effective to pay a home loan insurance premium annually, because most borrowers prepay the outstanding sum before the tenure ends. While in a one-time premium payment option, the premium is calculated for the entire pre-determined repayment tenure.

 

Importance of Home Loan Insurance for Borrowers and Lender

 

The utility of a home loan insurance scheme is unmatched and provides all-around protection to borrowers. Some of the home loan insurance benefits include:

 

Protect family: It protects the family from financial uncertainty, in case, if there is a sudden death of the borrower during the repayment tenure. The home loan insurance policy settles the outstanding home loan amount with the lender and the ownership of the property is transferred to the borrower’s family.

 

Protect Assets and other collaterals: It protects your assets and other collateral, as the lender will not seize the property to recover the dues of the outstanding loan amount.

 

Tax benefits: Since a home loan insurance plan falls under the category of term plan insurance, the borrower can claim a tax deduction under Sec 800 of the Income Tax Act for the premium paid.

 

Protects lenders from financial loss. For lenders too. home loan insurance helps them to prevent loan accounts from going bad and go through the time-consuming process of seizing the property to recover dues.

 

A home loan insurance cover is a win-win financial solution for both parties, as it saves from irreparable financial damage while protecting the property.

 

Wrap Up

 

Buying your dream home using a home loan is a big financial decision, as the repayment tenure lasts up to several years and EMIs form a significant part of your income.

 

Having insurance against home loans helps to protect your family against any uncertainty and the burden of home loan repayments is taken care of and they don’t have to abandon the house property due to non-payment.

 

Source: Fullerton

 

How would taking a home loan help you save taxes?

How would taking a home loan help you save taxes?

  • For someone servicing a home loan it might be one of the best tax-saving tools in their kitty, especially if they have exhausted all other tax saving avenues. Besides the tax saving, your home loan also helps you create an appreciating asset at the lowest interest rate. While many are aware about low interest rate and tax saving prospects of the home loan, very few are aware about what should be the optimum loan amount and tenure that gives them the best of both worlds at the lowest cost and fastest repayment. There are many limitations of this tax saving avenue, and it delivers the best saving only when you use it smartly. Here is a look at how to optimise your tax saving using your home loan.
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Why annual interest outgo of your home loan is most critical
 
You can save income tax on the home loan principal repayment amount up to Rs 1.5 lakh each year under section 80C of the Income-tax Act, 1961. However, this is a crowded avenue which has many other alternatives such as deductions available on EPF and PPF contributions, investments in ELSS, ULIPs, tax benefits on payment of school fee, life insurance premiums, and many more, due to which there is hardly any scope left for one to claim deduction on the home loan principal amount.
 
On the other hand, the tax saving that is offered on home loan interest payment under section 24b does not have any replacement and you can use this tax saving only when you are paying interest on a home loan. So, the annual interest outgo becomes a deciding factor as to how much tax you can save through your home loan. If you fall in the 30% income tax bracket you can save Rs 60,000 each year if your annual interest outgo is Rs 2 lakh or above. The lesser interest outgo you have, the lesser would be your tax saving.
 
“The deduction to claim interest paid is available for up to Rs 2 lakh within the overall limit of Section 24b in a financial year. In case of Let out property, there is no limit on the maximum interest that can be claimed. However, the loss that will be adjusted against other income heads such as salary etc. cannot exceed Rs 2 lakh in a financial year. The remaining loss under the head ‘Income from house property’ can be carried forward for 8 successive years to be adjusted against the income from house property only,” says Rishi Mehra, CEO Wishfin.com, an online financial market place.
 
 
Loan amount and tenure that delivers biggest tax saving
If you were to just look at tax saving, you need to go for a higher loan amount and the longest tenure to give you the maximum possible tax saving. For instance, if you take a Rs 30 lakh home loan for 15 years at 7% per annum interest rate, the total tax that you can save in 15 years is Rs 5.54 lakh, if you fall in 30% income tax bracket. On the other hand, if you have a home loan of Rs 50 lakh with a tenure of 30 years, the tax saving amounts to Rs 13.93 lakh in a similar situation.
 
However, the longer tenure will also mean that your total interest outgo is much higher. Instead of paying a total interest of Rs 18.53 lakh on a Rs 30 lakh home loan, you would end up paying a total interest of Rs 52.59 lakh on a Rs 50 lakh loan. As a result, your interest liability rises much more than the increase in the tax saving. The best way to strike a balance and find an optimum amount is by comparing the net interest rate after considering the tax saving benefits. Net interest rate is the effective rate of your home loan with which you would pay the same amount of interest that you would get by deducting the tax saving from the original interest charged by the lender. At the current prevailing rate of interest a home loan which is close to Rs 30 lakh with 15 years tenure can give one of the lowest net interest rates.
 
 
 
Why this is so?
Excess interest payment in higher loan amount
It is a myth that if you take home loan of a higher amount you would save more tax. The interest portion in a home loan monthly installment comes down each month as principal repayment increases correspondingly. So, the annual interest payment remains higher in the initial years while it comes down sharply in the second half of the tenure towards the end. However, the maximum tax saving that you can do on account of interest payment under section 24b is limited to Rs 2 lakh.
 
So, any amount of interest that you pay over and above Rs 2 lakh annually does not help you in saving taxes. During the first half of repayment if there are many years in which you are paying interest above Rs 2 lakh in a year, then it remains unproductive and will not help in saving taxes.


High loan amount with longer tenure comes with the dual disadvantage of higher interest outgo without any tax saving and longer period of debt outstanding. To optimise the best mix of lower interest outgo and higher income tax saving you can use partial prepayments to bring down your loan outstanding to a level where the annual interest is close to the Rs 2 lakh annual limit. This is the optimum level which will help you capture the best interest saving and keep your interest outgo at a level where it enjoys income tax deduction on the entire amount.
 
Not many want long tenure just for tax saving

Only a few are comfortable with a debt outstanding for longer periods just for the sake of saving taxes. Borrowers often looks for ways as how to use their home loan in a way that it offers a combination of best tax saving and timely payment of debt.
 
In this scenario keeping the tenure short will help you keep the interest cost lower and pay off your loan quickly. However, once your annual interest outgo comes significantly below Rs 2 lakh you will have unused tax savings. In such a situation, if you have the requirement to upgrade your house to a bigger one or plan to go for a second house then you can utilise the tax saving avenue offered on home loans again. This will ensure that you always keep the debt at lower levels and utilise the tax saving for longer periods at an optimum level.
 
 
Boost your tax saving with a joint home loan

If both spouses are paying a high amount of income tax, then they can take a higher home loan and enjoy the principal and interest deduction on the home loan separately. As a result, the couple can get a total deduction of Rs 3 lakh under section 80C (Rs 1.5 lakh plus Rs 1.5 lakh) on the principal repayment and Rs 4 lakh (Rs 2 lakh plus Rs 2 lakh) towards interest payment under section 24b. This means a bigger home loan of Rs 60 lakh with shorter tenure of 15 years could give them the optimum mix of greater tax saving and faster repayment of the loan. “All the applicants should also be co-owners of the property in order to claim this deduction,” says Mehra.
 
 
Extra deduction on buying an affordable house
 
If you have bought the house under the affordable housing category then an additional deduction of Rs 1.5 lakh is available under section 80 EEA. “The timeline to avail this additional deduction has been extended to 31st March 2022. So, all home loan related deductions put together can help you help you get a maximum deduction of Rs 5 lakh (Rs 2 lakh u/s 24, Rs 1.5 lakh u/s 80C and Rs 1.5 lakh u./s 80EEA) if it meets the specified conditions,” says Mehra.
  

Source: Economic Times

How can you save more taxes in 2022 ? Here are 6 investment schemes to save more money

The best time to start your tax saving investments is at the beginning of a calendar year or a financial year. While tax planning is important, getting aware of all tax saving schemes and choosing the right one is crucial.

 

Tax saving schemes ensure you don’t pay more taxes and make money in the long run by investing in savings-oriented schemes. Here are some of the best tax saving options with a deduction of up to ₹1.5 lakh in your income tax for the year.

 

Here are a few options of tax saving schemes:

 

ELSS Mutual Fund

Equity-linked saving scheme (ELSS) is a type of mutual fund scheme that primarily invests in equity funds. ELSS offers tax benefits to investors. The investments in the scheme are eligible for tax deduction under section 80C of the Income Tax Act, 1961 up to a maximum of ₹1.5 lakh.

 

One can invest through both lump sum and systematic investment plans (SIP) to avail the tax deduction. This way, ELSS offers both investment and tax saving benefits.

Here are the five top performing ELSS funds in the industry:

 

Funds% return in last 3 years
Quant Tax Plan37.52%
BOI AXA Tax Advantage30.92%
Mirae Asset Tax Saver26.53%
Canara Robeco Equity Tax Saver26.19%
IDFC Tax Advantage (ELSS)24.54%

 

National Savings Certificate (NSC)

NSC is a fixed income tax-saving investment plan that you can open with any post office branch. The scheme is an initiative of the government of India and hence is relatively safer. The investment in NSC qualifies for deduction under section 80C of the income tax act of up to ₹1.50 lakh.

These certificates earn an annual fixed interest of around 6.8% per annum (revised every quarter by the government), thus guaranteeing a regular income for the investor. The scheme has two types of certificates — 5-year and 10-year.

 

National Pension Scheme (NPS)

NPS is a pension cum investment scheme launched by the government of India to provide old age security to citizens of India. The scheme offers tax saving options to both government and private employees. Any citizen between the age of 18-60 can invest in it. The amount invested by the depositor is invested in several schemes including the equity markets. Again the basic amount of deduction offered by the fund is up to ₹1.5 lakh on the same amount of investment. However, NPS allows one to get an additional ₹50,000 deduction under section 80CCD (1B), taking the overall tax deduction amount to ₹2 lakh.

 

Unit Linked Insurance Plan (ULIP)

ULIP is offered by insurance companies that, unlike a pure insurance policy, gives investors both insurance and investment under a single integrated plan.

A portion of the premium paid by the policyholder is utilised to provide insurance coverage to the policyholder and the remaining portion is invested in equity and debt instruments. ULIP also provides tax deduction up to ₹1.5 lakh.

 

Here are the top 5 best performing ULIP plans in the industry:

ULIP plans by insurance companies% returns in last 3 years
PNB MetLife – Met Pension Plus27.40%
AEGON Life iMaximize Plan – Opportunity Fund23.40%
Bharti AXA Life – Future Secure Pension – Growth Opportunities Pension Plus23.30%
Future Pension Advantage Plan – Future Pension Active21.80%
Kotak Platinum Edge – Frontline Equity Fund21.40%

 

Public Provident Fund (PPF)

PPF is one of the safest investment options to start with that can help you secure your retirement and save tax as well. The PPF has a minimum tenure of 15 years with as little as ₹500 to open an account.

 

You can open a PPF account through a post office or in any nationalised bank.

 

Income tax exemptions are applicable on the principal amount invested in a PPF account. The interest rate for PPF is set and paid by the government for every quarter which is currently at 7.1%, more than the savings rate in banks. Taxpayers can claim a maximum deduction up to ₹1.5 lakh.

 

Home loan

If you have taken a home loan to buy a new house, you are also allowed to claim a deduction of up to ₹1.5 lakh under section 80C of the income tax. The deduction can be claimed on the principal amount repaid in the particular financial year. Check your home loan interest certificate for EMI payment details.

 

However, note that even if you put more money i.e ₹1.5 lakh each in any of the above tax saving options like ULIP, ELSS MF, your maximum deduction from taxable income will still be a total of ₹1.5 lakh only.

 

However, investing in NPS can get you an additional ₹50,000 deduction, taking the overall tax deduction amount to ₹2 lakh.

 

Source: Business Insider

 

6 things to note before applying for a Home Loan

A home is a place where you not only nurture your family and make memories for a lifetime but is also an asset that adds to your net worth and offers security. 


Since property prices are skyrocketing, it may be difficult to acquire a home with your savings alone. 


To help you take a step closer to your dream home, lenders offer an excellent financial solution in the form of a home loan.


Key Points to note before applying for a Home Loan


1. Home Loan has Eligibility Criteria

  • You should be a resident Indian.
  • Salaried applicants age between 23 and 62 yrs and self-employed between 25 and 70 yrs.
  • Work experience for salaried 3 yrs and for self-employed 5 yrs.

  • In addition to this, you are required to disclose sufficient income with which you can repay your loan.

2. Your Credit History

The interest rate you pay on your loan is linked to your credit score. CIBIL score of 750 or more reserves a lower interest rates. 


CIBIL score between 750 – 650 has to pay a marginally higher interest rate and below 650 can be a challenge.


3. Compare Interest Rates
The home loan interest rate is one of the key factors that determine the cost of borrowing. Don’t forget to compare interest rates among various banks & NBFC’s.


4. Home Loan requires documentation

  • KYC documents of the Applicant.
  • Income proof like Salary slips, Bank statements.

  • Business proof & Income tax return for the self-employed.
  • Legal documents of the property.

5. Home loans come with two types of interest rates
There are two types of interest rates on home loans: fixed and fluctuating. 


In the case of fixed interest home loans, the interest remains unchanged throughout the tenor of up to a few years until the reset date is reached. 


On the other hand, interest rates of floating home loans fluctuate as per the market scenario.


6. Home Loan EMIs increase with longer tenor.
Your home loan EMIs are calculated based on your loan amount, tenor, and interest rate.


It is natural that a high-interest rate adds to the home loan cost, which results in higher EMIs. The length of the tenor also has a significant impact on your home loan. 


The longer the tenor, the higher your EMIs will be, as the interest adds on with each month.


Now that you know the important things to consider before availing a home loan, go ahead and compare loans offered by lenders to get the best deal.