Take plot-cum-construction loan to save on taxes

I am 27 years old and my wife is 26. We are planning for a child by 2014.

My monthly income is Rs 60,000 and my wife earns Rs 30,000. I live in office given quarters. My current monthly expenses are Rs 18,000.

My monthly PF and VPF contributions amount to Rs 10,000. The current accumulation is Rs 6 lakh. My wife’s contribution is Rs 3,000.

Savings:

I have invested Rs 3 lakh in Gold ETF and I have Rs 5 lakh in a savings bank account. I intend to buy a plot for Rs 20 lakh with a loan of Rs 12 lakh.

Since I plan to construct a house there, is it better to take a personal loan for land and take home loan for construction?

For construction I need Rs 25 lakh, of which Rs 13 lakh I wish to draw from EPF. Once I get transferred to Chennai I will live in this house. I have no other investments.

Can I take a loan against my land in Tirupati for purchasing the plot? I wish to close the home loan within five years.

Is it advisable to pre-close the loan, or is there any better strategy to buy the plot?

I also wish to know whether I will get tax benefits for the land loan availed if I construct the house.

My father retired from defence service with a pension of Rs 12,000. Both parents are covered by health schemes for Rs 3 lakh. Is it better to take separate cover for them? My immediate family is covered by my employer.

— Sonu Dandala

While borrowing for construction you should look for various options to avail tax benefits. Take a plot cum construction loan. In such a case the tax benefits are available on both portions of the loan. The tax benefits are available only in the year of completion of construction.

No tax benefits are available in respect of principal paid back when the construction is incomplete .

Take a loan to buy the plot. Moreover, financial institutions will not be keen to lend against land.

Regarding your PF, you will be able to withdraw only Rs 10 lakh from your account.

If you borrow Rs 15 lakh, for 5 years at 10.5 per cent, your monthly outgo will be Rs 32,240. If you take the loan jointly with your wife, the interest component will be more attractive. Decide your loan tenure based on working life of your wife. Since your family is young it also makes sense to close liabilities if your surplus is comfortable. But with a combined EMI of land and building of Rs 58,000 you would not be eligible for a five-year tenure. You need to opt for a longer tenure.

Retirement is a long term goal. Hence, you must invest in mutual funds through systematic investment plans. Even you earn three per cent return over and above your PF, it will make a significant difference to your retirement corpus.

Health insurance

Take a top-up health insurance for your parents.

Term Insurance

Buy a term insurance policy for Rs 1 crore.

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