What is Principal Amount in Home Loan?

The process of securing a home loan can be daunting, especially for first-time borrowers. One of the key terms you will encounter in your journey is ‘principal amount’. This article will help you understand the principal amount in a home loan, how it is calculated, the ways to check the outstanding principal amount, and tax exemption pertaining to it.

Understanding the Principal Amount in a Home Loan

The principal amount in a home loan is essentially the sum of money that you borrow from the lender to purchase your home. It serves as the foundation upon which the interest of your loan is calculated. It’s important to note that the principal amount does not include the interest charges, processing fees, or any other additional charges.

How to Calculate Principal Amount in a Home Loan?

The principal amount of your home loan is determined by the price of the property and the down payment you make. For instance, if you purchase a house worth ₹50 lakhs and make a down payment of ₹10 lakhs, your principal amount will stand at ₹40 lakhs.

Also Read- Mini Loans or Small Personal Loans: All You Need to Know

Ways to Check Outstanding Principal Amount

The outstanding principal amount can be easily checked through the monthly or annual statements provided by your lender. These statements usually present a clear bifurcation of the principal and interest component for each EMI payment. Online portals of most banks and lending institutions also provide this information.

Can We Claim Tax Exemption on Principal Amount in Home Loan?

Yes, you can claim tax exemption on the principal amount repaid in a home loan under section 80C of the Income Tax Act. The maximum limit for this exemption is ₹1,50,000 per annum. However, this is subject to the condition that the property should not be sold within five years of possession.

The Impact of Principal Amount on Loan Tenure

The principal amount of your home loan has a direct influence on the loan tenure. Generally, a larger principal amount would mean a longer repayment period and vice versa. However, you can shorten your loan tenure by making larger repayments towards the principal amount.

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The Relationship Between Principal Amount and Interest

The interest on your home loan is calculated on the principal amount. Therefore, the higher the principal amount, the higher will be the interest that you will have to pay. It’s essential to consider this while deciding the principal amount to avoid unnecessary financial burden.

Conclusion

Understanding the principal amount in a home loan is crucial as it directly impacts your financial planning. It influences your monthly EMI, the total interest you pay, and the duration of your loan. Therefore, it is advisable to plan your finances carefully before deciding the principal amount.

FAQs

Is the principal amount and loan amount the same? 

Yes, the principal amount is essentially the loan amount that you borrow from the lender. However, the total loan amount may also include additional charges such as processing fees, insurance, etc.

How does the principal amount affect my EMI? 

The principal amount directly impacts your EMI. A higher principal amount would result in higher EMIs and vice versa. The interest component of the EMI is also calculated based on the principal amount.

Can I claim tax exemption if I sell the property within five years? 

No, the tax exemption claimed on the principal repayment of the home loan will be reversed if you sell the property within five years from the date of possession. The amount will be added to your income in the year of sale, and you’ll be taxed accordingly.

How can I reduce the principal amount of my home loan? 

You can reduce the principal amount by making a higher down payment while purchasing the property. Alternatively, you can also make prepayments towards your loan, which will reduce both the principal amount and the overall interest.

Can I increase the principal amount after the loan is sanctioned? Generally, it is not possible to increase the principal amount once the loan is sanctioned. However, you may be able to apply for a top-up loan or a second loan depending on your lender’s policies and your eligibility criteria.

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