When it comes to home loan, there is one more jargon that we need to understand and it is pre-EMI. So let me explain what is pre-EMI, how it is different from EMI?
EMI is quite commonly known terminology for loans which actually means Equated Monthly Installments but is very commonly used for easy monthly installments these days. When it comes to home loan, there is one more jargon that we need to understand and it is pre-EMI. So let me explain what is pre-EMI, how it is different from EMI.
What is pre-EMI?
Pre-EMI is the payment to banks before the actual EMI starts. The EMI cannot start because the complete loan is not disbursed.
Pre-EMI starts when you have selected a property which is under construction and there is some portion of the loan that is still pending to be disbursed.
So for example you selected a property that will become ready in 2 years time. You have to make 90% of the payment in next 1 year and rest at the time of possession. If you have loan approved of 50% of the property, you have to pay 40% of loan amount before possession of the flat and so it means loan has to be disbursed. Loan is given by the bank to the builder but then property is not complete and cannot be possessed by you and so EMI for the loan cannot be started.
So you may need to pay pre-EMI to bank which is composed of only the interest part of the amount disbursed till date.
How pre-EMI impacts loan tenure?
Normally pre-EMI has no impact on loan tenure because banks count the loan tenure from the date of complete disbursal of loan and not when pre-EMI is on.
So if your pre-EMI period is 1 year, aka your loan disbursal start to finish was done in one year for your 20 years loan tenure then your total time for the loan will be 20+1 years.
Still there is no rule as to pre-EMI period cannot be counted in the loan tenure and so always ask your bank if pre-EMI time is counted within the loan tenure or not.
Tax calculation on pre-EMI
Principal of Home loan EMI has tax saving under section 80C (up to 1.5 lakhs) and interest of the home loan under section 24 (up to 1.5 lakhs). Pre-EMI you only pay the interest and no principal is being paid and so you can claim the tax benefits for the interest paid only after receiving possession of the property in 5 equal parts in 5 consecutive years after possession.
The obvious question which is better EMI or pre-EMI?
The question of which one is better choice may come in your mind but more often than not, you will not have the option of making a choice between EMI and pre-EMI.
- If you have property ready, you have EMI as an option and pre-EMI does not come into picture.
- If your property is not ready and you have to get moving with a loan, pre-EMI is the only choice.
So it is not about which one is better choice but it is more about what you can opt for as a choice with your current property scenario and so don’t worry too much about making the better choice among EMI and pre-EMI, instead make a better choice of the property.
You may have an option of pre-EMI vs EMI if and only if you are opting to buy a second residential property but then tax saving options can vary depending on your reason to buy the second property.
Final thoughts
Hope the concept of pre-EMI is clear and how it differs from actual EMI. If you have more questions about pre-EMI or want to share your story of pre-EMI, share them in comments below.
Hi Shabbir,
One question. Consider my scenario. I took loan from a bank. They partially disbursed loan amount(something around 65%) to builder, and started collecting PRE-EMI from me. I am supposed to pay around 12 PRE-EMI installments. When I asked them how does paying PRE-EMI defers in terms of tenure and total re-payment(principle+total interest) amount over regular EMI payment? They replied me that there is ZERO difference in both of them. It means if I am paying EMI and my tenure is X years and total re-payment amount is Y, with PRE-EMI of first 1 year my total tenure will also be X and total re-payment(includes PRE-EMI part) will be Y only.
Now tricky part. Its been 4 months I am paying PRE-EMI on 65% disbursement and I might got possession yet 8 months later. They told me there will not be any change in EMI(that I am supposed to pay after 8 months) amount discussed as per regular EMI and yet above fact of “no change in tenure and re-payment amount” stands true. I really am feeling there is still some trick somewhere but not sure how exactly get clarification from them.
Can you please guide me if there is something wrong or I might need to clarify something from them?
See how the events unfold and then decide on things Nik. It is tough to assume things and when things are going smoothly, it is not wise to be doing too much of digging.
Hi Shabbir, very informative article. Thanks for sharing it
Pleasure is all mine and glad you liked it Paresh
Hi Shabbir,Your artical is always good,I have one doubt how can I claim Stamp duty and registration fee when I bought flat and did agreement on feb-2015,flat possession will be 2017-Jan.
Where you want to be claiming stamp duty and registration fee?
Hi Shabbir, as always yours article are very informative and useful. I would like to add some information regarding Pre EMI.
There are two types of Pre EMI. The one type in which only interest is paid and the other one is where both the principal amount as well as interest are paid (similar to EMI) for the disbursed amount. The second type has no impact no loan tenure.
Also in case of EMI one can increase the EMI amount to decrease the loan tenure but in case of Pre EMI, amount to be paid cannot be increased until it becomes EMI.
Regards
Vikrant
Vikrant, good to know about the two types of pre-emi and paying pre-emi principal only means you have paid everything due to the builder from your part and bank has some amount pending and now you are paying off your debt. So instead of making more debt from bank, better pay to the builder directly.