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Ramalingam

Ramalingam Kalirajan  |7628 Answers  |Ask -

Mutual Funds, Financial Planning Expert - Answered on Jun 14, 2024

Ramalingam Kalirajan has over 23 years of experience in mutual funds and financial planning.
He has an MBA in finance from the University of Madras and is a certified financial planner.
He is the director and chief financial planner at Holistic Investment, a Chennai-based firm that offers financial planning and wealth management advice.... more
Sb Question by Sb on Jun 13, 2024Hindi
Money

my employer disburse the personal loan amount to buy home of around 10 lakh or 20 lakh in the current finantial year and monthly emi gets deducted so since i will pay emi to employer monthly basis so income tax will be applicable on monthly deduction or not as i am not getting this amount.. Lets consider my yearly income as 10 lakh

Ans: Getting a personal loan from your employer to buy a home can significantly impact your financial planning and tax situation. This arrangement involves monthly EMI deductions from your salary, which raises questions about income tax implications. Let's explore this comprehensively.

Understanding Employer-Disbursed Personal Loans
Employer-disbursed personal loans are beneficial as they often come with lower interest rates and convenient repayment terms. However, it’s crucial to understand how these loans impact your taxable income.

Income Tax Implications on Employer Loans
When your employer disburses a loan, it’s not immediately considered part of your taxable income. However, certain factors can influence how it’s taxed.

Loan Amount and Interest Rate
The taxation on employer-disbursed loans depends on the amount and the interest rate charged. If the loan is provided at a concessional interest rate, the difference between the market rate and the concessional rate is considered a perquisite.

Perquisite Value Calculation
The perquisite value is the difference between the market interest rate and the concessional rate on the loan amount. This value is added to your taxable salary and taxed accordingly.

Exemption Limits
Loans for housing up to Rs 20 lakh typically have specific tax exemptions. If the loan amount exceeds Rs 20 lakh, the entire amount may attract different tax treatments.

Monthly EMI Deductions and Taxation
Monthly EMI deductions do not directly reduce your taxable income. However, the interest component of your EMIs can have tax implications.

Interest on Loan
The interest portion of your EMI can be claimed as a deduction under Section 24(b) of the Income Tax Act, up to Rs 2 lakh per annum for a self-occupied house. This reduces your taxable income.

Principal Repayment
The principal portion of your EMI can be claimed under Section 80C, subject to the overall limit of Rs 1.5 lakh. This also helps in reducing your taxable income.

Example Calculation
Let's break this down with an example to make it clearer. Assume your annual salary is Rs 10 lakh, and you take a Rs 20 lakh loan at a concessional rate of 4%, while the market rate is 10%.

Perquisite Calculation
The perquisite value will be calculated as:

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Perquisite Value = (Market Rate - Concessional Rate) * Loan Amount
Perquisite Value = (10% - 4%) * Rs 20 lakh
Perquisite Value = 6% * Rs 20 lakh = Rs 1.2 lakh
This Rs 1.2 lakh is added to your taxable income.

Interest Deduction
Assume the interest paid in a year is Rs 80,000. You can claim up to Rs 2 lakh under Section 24(b), thus reducing your taxable income.

Principal Deduction
Assume the principal repaid in a year is Rs 1.2 lakh. You can claim this under Section 80C, up to the limit of Rs 1.5 lakh.

Impact on Taxable Income
Your taxable income will be calculated as follows:

Gross Salary = Rs 10 lakh
Add: Perquisite Value = Rs 1.2 lakh
Total Income = Rs 11.2 lakh

Less: Section 24(b) Deduction = Rs 80,000
Less: Section 80C Deduction = Rs 1.2 lakh
Net Taxable Income = Rs 11.2 lakh - Rs 80,000 - Rs 1.2 lakh = Rs 9.2 lakh

Benefits of Employer-Disbursed Loans
Employer-disbursed loans can be advantageous due to lower interest rates and simplified processing. The key benefits include:

Lower Interest Rates
Employers often provide loans at concessional rates, which are lower than market rates.

Simplified Repayment
EMIs are directly deducted from your salary, ensuring timely repayments without manual intervention.

Convenient Processing
Loan processing through your employer can be quicker and require less documentation.

Financial Planning with Employer Loans
Strategic Use of Deductions
Maximise your tax benefits by utilising Section 24(b) and Section 80C deductions. Plan your finances to ensure you fully utilise these sections.

Budgeting for EMIs
Ensure that your monthly budget accommodates the EMI deductions comfortably. This helps in maintaining financial stability without compromising on other expenses.

Emergency Fund
Maintain an emergency fund to manage any financial contingencies. This ensures that your financial plan remains on track despite unexpected expenses.

Professional Guidance
Certified Financial Planner (CFP)
Consulting a Certified Financial Planner can provide tailored advice on managing your loan and tax implications. A CFP can help optimise your tax benefits and investment strategies.

Regular Financial Reviews
Conduct regular financial reviews to assess the impact of your loan on your overall financial health. This ensures that you stay on track with your financial goals.

Final Insights
Employer-disbursed personal loans for home purchase come with several benefits and tax implications. By understanding these aspects, you can make informed decisions and optimise your financial planning.

Your diligent approach to managing your finances is commendable. With strategic planning and professional guidance, you can effectively manage your loan and maximise tax benefits.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in
Asked on - Jun 14, 2024 | Answered on Jun 14, 2024
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Many Thanks to you sir for a very detailed response.. in timely manner. This will help..
Ans: You're welcome! If you have any more questions or need further assistance, feel free to ask. Best wishes on your financial journey!

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in
DISCLAIMER: The content of this post by the expert is the personal view of the rediffGURU. Users are advised to pursue the information provided by the rediffGURU only as a source of information to be as a point of reference and to rely on their own judgement when making a decision.
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Latest Questions
Ramalingam

Ramalingam Kalirajan  |7628 Answers  |Ask -

Mutual Funds, Financial Planning Expert - Answered on Jan 24, 2025

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Hello, I want a monthly withdrawal of 2lakh through SWP. Give me the amounts and expect ROI for various instruments that I should use. Also what factor to consider as I would be able to invest those amount lets say after a year.
Ans: To achieve a sustainable monthly withdrawal of Rs. 2 lakh (Rs. 24 lakh annually), we need to identify the right mix of investments and expected returns. Let us create a detailed framework.

1. Factors to Consider Before Investing
Time Horizon: You plan to start investing after a year. This delay impacts your compounding benefit, but planning ahead mitigates it.

Expected Rate of Return (ROI): Different instruments offer varied returns. Diversification ensures both growth and stability.

Withdrawal Feasibility: Sustainable withdrawals depend on balancing withdrawals with corpus growth.

Inflation Impact: Investments must generate returns above inflation to preserve corpus value.

Risk Appetite: Choose instruments aligning with your comfort towards volatility.

Tax Efficiency: Optimise your withdrawals and investments for better post-tax returns.

2. Expected ROI for Investment Options
Here is the expected ROI and rationale for different asset classes:

Actively Managed Equity Mutual Funds

Allocation: 50% of the corpus
Expected ROI: 12% annually
Rationale: These funds provide high returns and help beat inflation over the long term.
Debt Mutual Funds

Allocation: 30% of the corpus
Expected ROI: 7% annually
Rationale: These offer stability with moderate returns and are suitable for regular withdrawals.
Fixed-Income Instruments (e.g., FDs, SGBs)

Allocation: 15% of the corpus
Expected ROI: 6-7.5% annually
Rationale: Secure returns with no market risk. Ideal for stability.
Liquid Mutual Funds

Allocation: 5% of the corpus
Expected ROI: 4-5% annually
Rationale: Quick access for emergencies or interim cash flow needs.
3. Corpus Required for Rs. 2 Lakh Monthly Withdrawal
Corpus Based on ROI
At 8% ROI: A corpus of Rs. 3 crore is required.
At 9% ROI: A corpus of Rs. 2.66 crore is required.
At 10% ROI: A corpus of Rs. 2.4 crore is required.
The corpus requirement reduces with higher returns but increases risk exposure.

Building the Corpus Over One Year
If the funds are idle for a year, invest them in liquid mutual funds temporarily. These yield 4-5% with low risk.
Use Systematic Transfer Plans (STPs) to gradually move funds into equity and debt over 12-18 months.
4. Investment Plan for SWP
Equity Mutual Funds (50% Allocation)
Allocate Rs. 1.5 crore to equity funds.
Delay SWP for at least three years to allow growth.
Equity funds ensure high long-term returns, reducing inflation's impact.
Debt Mutual Funds (30% Allocation)
Allocate Rs. 90 lakh to debt funds.
Start SWP immediately from this portion.
These funds provide stable returns and low volatility.
Fixed-Income Instruments (15% Allocation)
Allocate Rs. 45 lakh to secure instruments like FDs or Sovereign Gold Bonds.
Use these funds for stability and emergencies.
Liquid Mutual Funds (5% Allocation)
Allocate Rs. 15 lakh to liquid funds.
Use these funds for interim liquidity needs and to manage cash flow gaps.
5. Steps for Efficient Withdrawal
Start withdrawals from debt and liquid funds first. Let equity funds grow for 3-5 years.
Monitor returns annually to adjust the withdrawal rate or asset allocation.
Keep a buffer of 1-2 years' expenses in liquid funds for emergencies.
Review the tax efficiency of your withdrawals and rebalance your portfolio every year.
Final Insights
A well-diversified portfolio ensures stable withdrawals of Rs. 2 lakh monthly. Focus on equity for growth, debt for stability, and liquid funds for emergencies. Starting the plan early and monitoring it regularly will ensure financial independence.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment

...Read more

DISCLAIMER: The content of this post by the expert is the personal view of the rediffGURU. Investment in securities market are subject to market risks. Read all the related document carefully before investing. The securities quoted are for illustration only and are not recommendatory. Users are advised to pursue the information provided by the rediffGURU only as a source of information and as a point of reference and to rely on their own judgement when making a decision. RediffGURUS is an intermediary as per India's Information Technology Act.

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