We are currently working on a housing loan scheme in which the effective rate of interest chargeable from an employee shall be at a simple rate of 6 per cent per annum, computable annually on descending outstanding balance of the capital account. The loan entitlement for an employee is being fixed at 50 month's salary with an upper loan ceiling of Rs 10 lakh repayable in 120 equated monthly installments. The employees are still discussing with the company the modalities of the scheme in order to derive maximum benefit available as per the provisions of IT Act. We would welcome your thoughts on the subject.

-R Kirtikan, Kochi

Basically, two types of rebates are available to an Indian income tax payer in respect of a housing property. One is a rebate under Section 88 of the Income Tax Act, which pertains to repayment of the principal loan amount subject to a ceiling of rupees 20,000 per annum. The second rebate is under Section 24 of the Income Tax Act, which relates to the interest paid by the assessee to service a housing loan. The monetary ceiling of this deduction in any one-assessment year is Rs 1 lakh. Assuming that an eligible employee has secured a loan of Rs 10 lakh then his maximum interest liability would be rupees 60,000 in the first loan year and this would fall in subsequent years. On this basis, the total repayment liability (principal loan amount plus interest on descending annual balances) would be approximately Rs 13.71 lakh. In other words, the employee's EMI would be Rs 11,000 per month for the first nine years and Rs 15,251 per month in the tenth year. Assuming that the employee wishes to maximise his taxsavings within the ambit of company loan policy, it must be ensured that the principal loan repayment amount in each year is not less than Rs 20,000. Considering that an employee availing a loan of Rs 10 lakh will have a basic salary of Rs 20,000 per month or more, it is apparent that he will be in the highest income tax paying bracket. The accompanying table delineates the recommended manner, in which, his annual EMI should be adjusted for payment of principal loan amount and the interest accrued there on throughout the entire loan period of ten years.

From the accompanying table it is apparent that the entire interest payment aggregating Rs 3.71 lakh is subject to income tax relief and on this amount the assessee will be saving income tax of 34 1/2 per cent which is Rs 1,27,991 under Section 24 of the IT Act. In addition, he will also be able to avail a cumulative benefit pertaining to deduction of Rs 2 lakh under Section 88 of the IT Act. Since the total payment required to service a loan of Rs 10 is Rs 13.71 lakh, the company could help to minimise the impact of a balloon payment in the last loan year by fixing the EMI at Rs 11,425 per month for the entire loan term.