What is Pre-EMI Interest ?

When taking a loan that is disbursed partly for instance home loan taken for an under-construction property or education loan, borrowers have the option to either make loan repayment in full as equated monthly installments or EMIs calculated on the basis of total loan amount or as pre-EMIs or PEMI.

In case of the latter, the interest is payable on a monthly basis only on the partial loan amount disbursed till the bank disburses the remaining loan amount. Real EMI would then commence as and when the home loan borrower gets possession of the housing property.

The facility to make pre-EMI or PEMI is available only in case of housing property that are under construction as the loan is disbursed partly at each construction stage. Further, the facility to make home loan repayment through the pre-EMI route is granted nearly by all leading lending financial institutions.

Now the question arises which is a better course to take while making loan repayments- EMI or Pre-EMIs?

The selection of full EMI repayment mode is deemed as beneficial in the longer run as borrower of the loan starts paying the principal amount from day one itself. So, in this case total outstanding principal amount by the time the property is taken possession of is reduced manifolds.However, in case project completion gets delayed, loan borrower may end up paying more than the principal loan amount even before getting possession of the property.

So, in all pre-EMI mode can result in hefty payouts on the part of the borrower as he pays the interest amount during the loan tenure in addition to the term before the final disbursement of the loan.

However as suggested, pre-EMI turns out to be a better loan repayment mode in case the home buyer wishes to sell the property soon after getting the possession.

Other disadvantages of pre-EMI loan repayment mode:

Though, pre-EMIs seem to be less burdensome at first as only the interest component on the loan amount disbursed is required to be paid until the final loan amount disbursement, it results in more number of payouts. In contrast, opting of full EMI mode results in lower tenure with the decrease in principal amount.

Pre-EMI interest amount paid when the property was under-construction does not qualifies for tax deduction with respect to the principal amount repaid. However, loan repayment either by pre-EMI mode or as EMI in taxation terms is treated without much difference and in fact tax deductions are only allowed on the interest paid post the completion of the project. The interest amount paid is divided into five equal proportions and allowed for tax deduction once the project is completed.

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