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'Prepay home loan or invest in mutual funds?'
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June 19, 2008

With interest rates on home loans likely to increase in the next couple of months should you think about prepaying yur home loan if you have the money? Or should you invest the same in a mutual fund?

Is it the right time to invest in equity linked saving schemes or should you wait for some more time before taking the plunge? What is more beneficial with respect to tax planning and saving: going for a joint loan with your spouse or going for it alone?

 In a chat with readers on June 18, Get Ahead tax expert Mahesh Padmanabhan answered these and many more queries related to tax benefits on home loans, HRA benefits, capital gains tax and how to plan and invest your money in 2008-09?

For those of you who missed the chat, here is the transcript.

rambo asked, I am married and planning for a baby. My ammual salary is Rs. 400,000.00. I pay H/L instl around Rs.139,968.00 per year(inclusive of int), Insurance premiums total of Rs. 21,000.00 per year. Please advise is the above sufficient for tax savings as well as investment and protection. pls advise in wht else i can invest for protection as well as earn some income.

Mahesh Padmanabhan answers, You would have a capacity to claim the following deduction subject to actual investments being made: Upto Rs. 1.5 Lakhs of interest on housing loan Upto Rs. 1 Lakh for specified investments under section 80C You would need to take a provisional certificate from the home loan institution and determine how much principal repayment you would make during the year and interest deduction that you could avail subject to the above mentioned limits. As regards further investment for deduction u/s 80C you could use ELSS Mutual fund, ULIP, PPF etc. ULIP is the only investment that could get you both insurance and investment option simultaneously.

nadu asked, my daughter is 25 years and i am filling her return.there is approx. 4 lac of amount i shown as keep in i want to stop filling her return looking her merrage how i do it???

Mahesh Padmanabhan answers, Filing of i-tax returns is mandatory for females only if their taxable income is in excess of the tax free threshold limits i.e. Rs. 1.8 Lakhs for the current financial year. If your daughter's income does not exceed this limit then you need not file the returns.

Padma asked, Hi Mahesh, Good day to you...Which is effective as per your say?Husband and Wife,(assuming they are well-off to pay the EMI to save tax),taking individual house loans for individual houses each or joint loan for both the homes.i.e.two houses but joint loan for both availed by spouses,one after another?

Mahesh Padmanabhan answers, Good Day to you too. Would recommend two separate house with the spouse's name as nominee. This would help in managing your wealth tax efficiently

Padma asked, Does prepaying a home loan makes sense instead of investing in Mutual Funds?May be when the debt for House loan is cleared, MF could be considered right?Or do the MF outrun the effect of prepaying the HL?

Mahesh Padmanabhan answers, Generally in case of a 20 year loan, the first few years are heavy on the interest front and thereafter the principal portion goes on increasing. Hence if you are prepaying the loan in the initial years, it might prove to be effective. The home loan rate might be 10 - 12% as against the long term MF investment that might yield about 14 - 16% hence it might still make sense to keep investing in MF.

rajesh asked, i am investing in HDFC [Get Quote] tax saver in monthly SIP of Rs.1000/- from last 1 year or so. At the time of investing the NAV is 202, now it is 140 due to equity market. What to do next. Keep investing in this or sale. I am long term investor. Please advice.

Mahesh Padmanabhan answers, The beauty of SIP is that it leverages the downside against the upside swings in the stock markets. SIP gets you higher no of units when the market is down. If you are a long term investor continue investing to reap the yield in the long term.

raj asked, which type of savings is useful to save tax like nsc or ppf?

Mahesh Padmanabhan answers, Other investment options under section 80C are; ELSS MF, ULIP, Life insurance, home loan principal repayment, school tution fees etc. Apart from the above, you could get deduction under section 80D for medical insurance premium.


Mahesh Padmanabhan answers, Term policies are definitely cheaper than any other endowment or ULIP policies. You could leverage on the cheap insurance premium to invest better in MFs.

rajinder asked, Hi, I am a partner in one firm and get remuneration ( appx. 2.5 lakh p.a.), how I can get benefit of this payment in TAX. Can I claim any rebates or adjust any expenses? Also I have shifted to new state to do business from Jan 2008. Where should I file my return? At new address / state or previous address?

Mahesh Padmanabhan answers, Any expense incurred with regard to your services rendered to the partnership firm, which might not have been reimbursed back, then you could claim the expense deduction. You would first need to update the PAN database of the income tax department with the change in address. You could use the PAN Correction Form to update the changes. Thereafter you could file your returns at your new residence.

shankar asked, how should one declare the capital gains? I mean should it be the 10% of my selling price minus avg cost of stocks or selling price minus the individual lot that i got the shares for?

Mahesh Padmanabhan answers, You would need to work out the individual transactional capital gains / loss. Thereafter segregate these into long & short term transactions and then work out the net gain or loss in each segment. Generally in case of stocks the FIFO basis is followed.

ksash asked, Hi Mahesh, is it the right time to invest in ELSS, or is there a chance that i would get the units at cheaper NAVs for the FY 2008-09? Thanks in advance.

Mahesh Padmanabhan answers, You could use the Systematic Investment Plan (SIP) route to invest even now as the rupee cost averaging principle could work in your favour. In case you have bulk amount to invest then you could use the Systematic Transfer Plan (STP) to invest your bulk amount in money market securities and thereafter keep moving fixed sums to the equity segments.

RajTaxQuery asked, I have joined a new company in AP this May. Before this I was in Pune so where I have to file my return this year and can I do e-filing?

Mahesh Padmanabhan answers, You can file your returns at AP. However, you would need to update your current address with the income tax department using the PAN data change request Form. You could e-file your i-tax returns but you would need to physically file the signed ITR-V with the local i-tax department in case you do not have a digital signature.

sundars asked, last year..fully i worked in bangalore and last month i got transferred to chennai...where should i have to do my file returns.....plz advice....

Mahesh Padmanabhan answers, Please refer to my earlier answer to Rajtaxquery for the same issue.

Bhadkamkar A. V. asked, Are conveyance allowance upto Rs.800/- and reimbursement of petrol and car maintence expenses both exempted from I.Tax?

Mahesh Padmanabhan answers, Transporation allowance of Rs. 800 per month is an exempt allowance. Petrol expense incurred for official purpose is not taxable. However, if you are claiming the deduction for petrol reimbursement then you cannot additionally claim the benefit of transport allowance.

Shanthi asked, I am 24 Yrs & my CTC is 2.4 lacs. i don't hve any idea abt Tax. can u pls. guide me in this.

Mahesh Padmanabhan answers, You could start off with filing your returns using your form 16 (issued by your employer). You could make use of a good tax practitioner to guide you to conduct your tax life in a planned manner.

sunny asked, Hi Mahesh , i have paid only interest on my home loan for previous financial year, since the flat is still underconstruction, do i need to declare the interest paid in the ITR-2 form this year. I know that i will get tax benefit only when i get the possesion of the flat.

Mahesh Padmanabhan answers, You are right in your understanding that pre-construction interest is allowable only after completion of construction. You need not declare such interest in the earlier ITR. You would need to retain the certificates and use the same after the completion of construction.

FD asked, I have taken voluntary retirement and only have Earnings from the Shares Market (Equity). What is the category of Tax Bracket that I will fall under this year 15% tax or Business Income(>30%) ???

Mahesh Padmanabhan answers, If you are holding the shares from the perspective of earning dividend and capital appreciation, then the capital gain resulting from any sale transaction would be included under Income from capital gains. If the transactions are done from the intention of trading and deriving immediate gains then it might get covered under the head Income from business / profession. The tax however, would depend on the slab you fall in.

deepakjagga asked, Hi Mahesh, I got one FD matured during the last financial year, the interest obtained in that was less than 10000 Rs, so no TDS was deducted by the bank and I didn't get the Form 16A. Now i'll declare the details of the FD in the return. I wanted to know whether i need to attach any documents related to the FD?

Mahesh Padmanabhan answers, You would not be needed to attach any documents along with the ITR but you would be advised to retain the maturity slip in your records till such time your case has been assessed by the i-tax office.

ashish_goel09 asked, HI, I have a house on my name in Gurgaon, but I stay in Noida. Is it possible that I avail tax benefit on home loan and my wife claim HRA simultaneously?

Mahesh Padmanabhan answers, If you are staying in the rented premise due to reason of employment, then you could avail both benefits of HRA & home loan.

chaitra asked, Hi,Is going for home loans a good way of tax savings & investments?pls reply

Mahesh Padmanabhan answers, The price of properties seems to be too heated up and hence if there is no compelling reason, you could defer the home acquistion decision for a while. You could use the ELSS MF route to invest from a long term perspective.

dayakar asked, Can a owner of 2 wheeler claim tax deduction for petrol bills of more than Rs. 800 per month?

Mahesh Padmanabhan answers, Please refer to my earlier answer on the same subject. Anyways reimbursement of bills & transport allowance are 2 separate aspects and should not be mixed up.

live asked, Hi Mahesh, Good day. My annual income is around 2 lakhs. I was unable to file the returns from past 3 years. Can i file the returns this year for past 3 years. I do hold form 16.

Mahesh Padmanabhan answers, Good day to you too. You can file your i-tax returns for the financial years 2006-07 and 2007-08.

Jigar Patel asked, Hi Mahesh, my company is offering me ESOP for Rs.14 and asking me to take care of any FBT come up. Current market value of share is Rs.90, what will be my tax liability in this case? And what will be tax liability if company need to pay this FBT?

Mahesh Padmanabhan answers, please write in to for this query as it needs further information.

siva asked, Dear Mahesh, what is the tax % we need to pay for ESOP sold out side INDIA (US stock) if we are salaried employees in INDIA?

Mahesh Padmanabhan answers, please write in to for this query as it needs further clarity

Mahesh Padmanabhan is principal advisor -- direct taxes group, RelaxWithTax Consultants Pvt Ltd, a Mumbai-based personal taxation and finance solutions provider.

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