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Pre EMI vs Full EMI Know the Difference

Published On Dec/14/2023

Pre EMI vs Full EMI - Know the Difference

As you stand on the precipice of fulfilling your cherished dream of becoming a homeowner, navigating the complex landscape of home financing options becomes an endeavour of paramount importance.

In this article, we embark on an illuminating expedition into the intricate world of home loan repayment. The clear aim is to shed light on the nuanced disparities between pre-EMI and Full EMI, empowering you with the knowledge to make a precise decision.

Pre EMI Payment

Pre EMI payment, or Pre-Equated Monthly Instalment, is a repayment option for under-construction properties in the real estate sector. It differs from Full EMI (Equated Monthly Instalment), the conventional method of repaying a home loan.

In the Pre EMI scenario, borrowers pay only the interest component of the home loan for a certain period. This period usually coincides with the construction phase of the property.

The key features of Pre EMI payments include:

Key Features of Pre EMI

  • Interest-Only Payments: Throughout the construction phase of your property, you only pay the interest on the loan amount disbursed by the bank. This means your monthly payments are relatively lower compared to Full EMI.

  • Gradual Increase: As the construction progresses, the loan disbursal increases. Consequently, your Pre EMI amount gradually rises until the project is completed.

  • Principal Repayment Deferred: You do not start repaying the principal amount of the loan until the project is finished and you shift to Full EMI.

  • Ideal for Under-Construction Properties: Pre EMI is typically the preferred choice when purchasing an under-construction property as it aligns with the construction timeline.

Full-EMI Payment

Full-EMI, or Equated Monthly Instalment, is the traditional and widely used method of repaying a home loan. Unlike pre-EMI, where borrowers initially pay only the interest component of the loan, Full EMI includes both the interest and principal components in each monthly instalment right from the beginning of the loan tenure.

Key Features of Full EMI

  • Comprehensive Repayment: With Full EMI, you start repaying the principal and interest from the beginning of the loan tenure.

  • Steady Monthly Payments: Unlike Pre-EMI, where payments increase over time, Full EMI ensures consistent monthly instalments throughout the loan tenure.

  • Faster Loan Closure: Since you're repaying the principal amount right from the start, Full EMI allows you to reduce the outstanding loan balance more quickly.

  • Ideal for Ready-to-Move-In Properties: Full EMI is typically chosen when buying a ready-to-move-in property as there's no construction phase to consider.

When is Pre-EMI Ideal?

Pre-EMI payments are considered ideal in specific scenarios, primarily around purchasing under-construction properties. Pre-EMI is an ideal choice when buying a property still being constructed and when you want to manage your cash flow efficiently during the initial phases of the property purchase. It offers financial flexibility tailored to the construction timeline of the property.

Pre-EMI payments can be advantageous in specific scenarios:

  • Under-Construction Property: If you're purchasing a property that is still being built, Pre-EMI aligns with the construction schedule, ensuring you make lower initial payments.

  • Cash Flow Considerations: If you have temporary cash flow constraints and anticipate improved financial stability in the future, Pre EMI can ease the burden during the initial years.

  • Interest-Only Budget: When you prefer to allocate funds primarily towards interest payments initially, Pre-EMI provides that flexibility.

  • Tax Benefits: Although Pre EMI payments do not offer tax benefits on principal Repayment, under Section 24(b) of the Income Tax Act, it is liable for tax benefits on the interest component.

When is Full EMI the Better Option?

Full EMI is the better option when buying a ready-to-move-in property, seeking faster loan repayment, preferring a stable and unchanging monthly instalment, and wanting to maximize tax benefits right from the start of your home loan tenure.

Full EMI payments have their own set of advantages and are often preferable in certain situations:

  • Ready-to-Move-In Property: Full EMI is the more straightforward choice if you're buying a property ready for occupancy, as there is no construction phase to accommodate.

  • Faster Loan Repayment: Full EMI allows you to start repaying the principal immediately, leading to quicker loan closure and reduced overall interest payments.

  • Stable Monthly Commitment: If you prefer a consistent and unchanging monthly instalment, Full EMI ensures that throughout the loan tenure.

  • Tax Benefits: Full EMI payments offer tax benefits on both the principal (under Section 80C) and interest (under Section 24(b)) components of the loan, helping you save on taxes.

Tax Benefits

Understanding the tax implications of both Pre-EMI and Full EMI is essential when making your choice:

Pre-EMI Tax Benefits: Pre EMI payments offer tax benefits on the interest component under Section 24(b) of the Income Tax Act. However, these benefits are available only after the construction is complete and you switch to Full EMI.

Full EMI Tax Benefits: Full EMI payments provide tax benefits on both the principal (under Section 80C) and interest (under Section 24(b)) components of the loan right from the beginning of the loan tenure.

When deciding between pre-EMI and Full EMI, it's essential to factor in the tax implications and how they align with your financial goals. Full EMI provides the advantage of faster principal Repayment and offers immediate tax benefits on both principal and interest payments.

Also Read: What is Principal Amount in Home Loan – Important Things to Know

In contrast, Pre EMI offers tax benefits on the interest component but only after the completion of the construction phase. Consider your tax planning objectives and property purchase timeline when choosing between these repayment options.

Conclusion

Choosing between pre-EMI and Full EMI depends on your circumstances and financial goals. Consider the construction status of your property, your cash flow, your preference for interest-only payments, and the tax benefits you seek.

Ultimately, both options are effective ways to finance your home, and making an informed decision will help you manage your loan efficiently and achieve your homeownership dreams.

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