There are many who prolong their housing loan EMIs just to continue availing tax benefits under section 24 (on the interest component) and under section 80C (on the principal component) of the Income Tax Act 1961, and pay lesser taxes as a result. Even though they have the surplus to repay the loan earlier, they prefer holding on. The old school of thought is in complete contrast and has always favoured cleaning up the loan book at the earliest and growing assets rather than liabilities. It is also linked to the fact that the final cost of real estate is much higher as the loan period gets longer. Here is a table which explains this fact -

Assumed interest rate is 9%. Table is for illustration purposes only. The calculations are based on assumptions and actual results may vary depending on many factors.

The above table indicates that you save Rs.16.68 lakhs (57.97-41.28) in EMI outflows if your loan tenure reduces by 5 years from 20 years to 15 years. The saving is almost Rs.32 lakhs (57.97-26.01) if the loan tenure is reduced by 10 years from 20 to 10 years. So there are big financial benefits by having shorter EMIs for sure. If you notice, the cost of the asset more than doubles in case of the 20 year tenure as you repay Rs.1.08 crore on a loan of Rs.50 lakhs.

Besides the financial benefits, there are some qualitative aspects favouring shorter EMIs. The first is regulatory risk. What if current favourable tax laws change in future? Hence, investment plans must always follow rationality rather than only tax benefits. The goal should be asset creation while tax saving is a supplementary benefit. In many cases, this is reversed - the goal is to avail tax benefits while asset creation is the supplementary benefit.

The second aspect to look at is consistency of income. We are all ‘ever optimistic’ and believe that incomes would always rise thus making EMIs of today look much smaller in future. However, there could be periods of economic down-turn when incomes could come under pressure and EMIs may appear to be a burden on our finances. Thus shorter EMIs not only provide financial benefits but also protect from unforeseen risks in future.

On the other hand, SIPs are the route to build a corpus to meet various life goals. Unlike EMIs, the verdict is in favour of longer SIPs mainly to benefit from the power of compounding. The below table shows how longer SIPs help to create a larger corpus through compounding, proving that consistency and longevity are the hallmarks of a wise investor.

* For Illustration purposes only. These are assumed returns and actual returns may vary. Monthly investment at the beginning of the month. Return on SIP investment is assumed to grow @12% p.a.

Thus the money saved on EMIs owing to early re-payment of loans can be added to your monthly SIP contribution. This can either help you to meet goals which were earlier excluded like a say a bigger car or a foreign trip or even to save more for important goals like retirement. So shorter EMIs and longer SIPs (which is like your good EMI) could be your new financial stress busters.

Information contained in this article is not a complete representation of every material fact and is for informational purposes only. The recipient is advised to consult its advisor/ tax consultant prior to arriving at any investment decision.