SBI and ICICI hike loan interest rates

Country’s two largest banks – State Bank of India and ICICI Bank both increased their benchmark lending rates because of a sharp increase in the cost of funds.

SBI increased its base rate by 40 basis points to 8 per cent, ICICI Bank followed with a 50-bp hike to 8.25 per cent. The new rates are effective from Monday.

The increase in lending rates is mainly due to a sharp increase in banks’ cost of funds. While most banks hiked retail deposit rates by 50-150 basis points in December, short-term rates have also moved up. The interest rate on three-month certificates of deposit has gone up by 250 basis points since the beginning of October.

Can interest deduction be claimed even if possession of house is not taken?

No, its not possible to claim interest , but principal amount upto Rs 1,00,000 can be claimed as deduction u/s 80C of the I T Act.

Pre-EMI Interest

The bank may disburse a partial amount to you / builder depending on the stage of construction of the house. In this case, you do not pay an EMI, but instead, pay a pre-EMI interest.

You can not claim any income tax benefit on this pre-EMI interest in the year you pay it to the bank.

Pre-EMI interest can be claimed in 5 equal instalments after the construction of the house ends. That is, it can be claimed in 5 equal instalments starting from the FY in which the construction of the house ends and you get its possession.

This pre-EMI interest should be claimed along with the interest component of the EMI under section 24. The overall limit remains Rs. 1.5 Lakhs even in this case.

Example

Let’s say you pay Rs. 20,000, Rs. 30,000 and Rs. 30,000 as pre-EMI interests in years 2003-04, 04-05 and 05-06 respectively.

Now, say you get possession in 2006-07. Then, you can claim Rs. 16,000 (A fifth – or 20% – of Rs. 80,000, which is the total pre-EMI interest paid by you) per year from 2006-07 to 2010-11.

Are you paying EMIs before getting possession of the house?

Many banks actually disburse the full loan amount even if the construction of the house is not complete. In this case, you start paying the EMIs straightaway. What happens in this case?

Here, you do not get any income tax benefit on the principal amount for the EMIs that you paid before getting possession of your house (as principal component can be claimed only after you get possession of the house).

You can start claiming the income tax benefit of the principal amount u/s 80C starting from the financial year in which you get the possession of the house.

The interest component of the EMIs that you paid before getting possession of your house should be treated similar to pre-EMI interest (as explained above).

Thus, you should add up all the interest that you paid through EMIs before you got the possession of the house, and start claiming 20% of it each year (for 5 years) starting from the financial year in which you got the possession of the house.

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The Same Old ‘Highest NAV’ Trap

Birla Sun Life Insurance has launched ‘BSLI Platinum Advantage Plan’. One of the professed advantages of the BSLI Platinum series is that it safeguards against the possible downsides of the equity market through a guarantee of highest daily net asset value (NAV) over seven years. The new Plan also offers choices like enhanced sum assured option and riders that allow customers to increase their financial security at a nominal additional cost.

Reliance Life Insurance has also announced the launch of a new unit-linked insurance plan (ULIP). The Reliance Life Insurance Highest NAV Advantage Plan offers guarantee on maturity with the highest NAV per unit achieved during the entire 15-year policy term.

Either there is a dearth of innovative ideas, or highest NAV products are garnering good business from risk-averse investors. V-Secure has consistently mentioned that highest NAV guarantee products will fetch poor to average returns, because the only way to get guaranteed returns is to first protect the principal amount and this is possible by primarily investing in bonds.

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ICICI Bank, HDFC withdraw teaser home loan scheme

Private sector lenders ICICI Bank and HDFC Ltd today discontinued with teaser home loans — under which customers get credit at concessional rates for the first few years — in a move that reflects RBI’s concern on such loans.

It could not be ascertained whether state-run SBI, which pioneered this scheme, too would be discontinuing with the concessional rate scheme.

According to sources, HDFC’s scheme of dual rate home loan, which was to expire today, will not be extended.

ICICI Bank has withdrawn the teaser rates on home loans with immediate effect, an ICICI Bank spokesperson said.

Under teaser rate, HDFC offered home loans at a fixed rate of 8.5 per cent up to March 31, 2011, 9.5 per cent for a period between April 1, 2011 and March 31, 2012 and the applicable floating rate for the balance term.

Similarly, ICICI Bank had offered a rate of 8.5 per cent in the first year, 9.25 per cent in the second year and 1.5 per cent over and above the base rate in the third year.

It may be recalled that in its policy review meeting last month, RBI had voiced concern over the high risk of default on loans offered at teaser rates.

However, then many banks had expressed reservations, arguing that loan off-take would be impacted adversely.

The move by the top two private sector banks would temper the demand for housing loans and eventually help cool real estate rates in an economy faced with high inflation.

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