Tax savings bring relief to home buyers in India

Home buyers in India heaved a sigh of relief as the Reserve Bank of India (RBI) finally ushered in lower lending rates, making home loans more affordable and increasing disposable income for individuals. The RBI’s decision last week to cut the repo rate by 25 basis points from 6.5 per cent to 6.25 per cent comes less than a week after the income tax bounty announced by the finance minister in this budget, and is welcome news for borrowers, both existing and new.

Impact on new borrowers

For those looking to take a new home loan, the rate cut reduces borrowing costs significantly. A new borrower taking a ₹50 lakh home loan at 8.50 per cent instead of 8.75 per cent would pay approximately ₹794.37 less in EMI per month, leading to savings of ₹1.9L over the duration of the loan. This enhances affordability and makes homeownership more accessible.

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Impact on existing borrowers

For those already servicing a home loan, the rate cut directly affects their loan interest rates. Let’s consider a borrower who took a ₹50 lakh home loan a year ago at an interest rate of 8.75 per cent for a 20-year tenure. The EMI for this loan would be approximately ₹44,185 per month.

With a 25-basis point rate cut, the new interest rate would be 8.50 per cent. Lenders typically do not change the EMI but revise the tenor whenever there is a rate change. This means with each rate cut, the overall interest on the outstanding reduces and every EMI contributes more to the repayment of the outstanding principal. In this case, this results in interest savings of approximately ₹8417 per lakh over the duration of the loan with 10 EMIs being shaved off the loan tenure. On a ₹50L loan, the borrower could save over ₹4.20 lakh in interest payments over the entire loan tenor, if the loan runs its full course.

Tenure vs EMI adjustment

By default, banks adjust the tenure of the loan when interest rates drop, keeping the EMI constant but reducing the overall loan term. This means borrowers could close their loans a few months earlier, leading to long-term savings on interest payments.

However, borrowers can also opt to lower their EMIs instead of reducing the tenure. If they choose this option, the EMI would be around ₹43,417, meaning their monthly outflow would reduce by ₹768 or ₹9216 per year, increasing their monthly disposable income, which could be redirected towards investments, savings, or daily expenses. Over the entire loan tenure, the borrower could save over ₹1.75 lakh in interest payments if the loan runs its full course.

Additional savings from tax cuts

The recent tax changes, including lower tax slabs and higher deductions, can lead to additional savings of up to ₹1.14 lakh per annum or ₹9,533.42 per month for salaried individuals earning ₹25 lakh. This means you can hope to save a total of ₹1.37 lakh in FY2025-26 or ₹11,379 per month (₹ 9,533.42 from income tax and ₹ 1,845.74 from lower interest; even if this interest is not realised per month but only as cumulative savings over 19 years) through a combination of interest savings on the home loan rate reduction of 25 BPS and the tax savings from higher tax slabs from April 1.

This extra savings provides an excellent opportunity to help you increase spending on lifestyle improvements without financial strain: Prepay the home loan faster and save on interest; Invest in retirement planning; Build an emergency fund for financial security.

A boost for millennials and first-time home buyers

The biggest chunk of borrowers typically are in their 30s and 40s. For them, balancing loan repayments, investments, and lifestyle expenses is crucial. The repo rate cut, coupled with tax savings, provides the perfect opportunity to reduce financial stress, increase investments, and achieve financial goals faster. Whether it’s saving for children’s education, upgrading a home, or planning early retirement, the benefits of lower interest rates and higher disposable income are immense.

The repo rate cut of 25 basis points translates to real financial gains for borrowers. By making the right choices—whether opting for a lower EMI or reducing loan tenure—individuals can maximize these benefits and secure a stronger financial future.