Exemption from compound interest: amount that your bank can credit to your account

MUMBAI: Banks are likely to credit interest on accrued interest on borrowers’ loans during the 6-month standstill period (March 1 to August 31) by November 5, according to the affidavit filed by the government to the Supreme Court.

The government had announced on October 23 a gratuitous waiver of the interest on interest scheme to provide relief and financial support to borrowers who may face financial hardship due to covid-19.

Under this regime, the government will cover accrued interest on interest earned during the moratorium period and not all interest unpaid during the period. The benefit is available to all borrowers with an outstanding loan, including credit card dues and home, education, auto, personal and consumer loans up to 2 crore as of Feb 29, 2020. The benefit will be available to those who opted in for the moratorium or not.

According to the guidelines issued by the government, the relief will be equivalent to the difference between compound interest and simple interest for the six-month period. The calculation will be the same for all borrowers, those who have not opted for the moratorium, those who have opted for the six-month moratorium and those who have opted for less than six months of moratorium.

It is not available on loans that went into default on or before February 29. It is also not available on loans such as term deposit loans.

So, with the help of Bankbazaar.com, we’ve done some back-of-the-envelope calculations on how much borrowers are likely to benefit from the program. Let us understand how much money is likely to be credited to the borrower’s account against different loans.

Case 1: Home loan: Assume a loan of 50 lakh for 20 years at 8.5%. On this loan, the first 12 IMEs are paid on time, then IMEs 13 through 19 are deferred during the moratorium.

Case 2: Car loan: 10 lakh for 6 years at 10%. On this loan, the first 12 IMEs are paid on time, then IMEs 13 through 19 are deferred during the moratorium.

Case 3: Personal loan: 5 lakh for 4 years at 13%. On this loan, the first 12 IMEs are paid on time, then IMEs 13 through 19 are deferred during the moratorium.

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Interest waiver table

“Note that the notification indicates that the interest would be calculated based on the interest rate as of February 29, 2020. So even if your interest rate has decreased during the 6 months of moratorium, the calculation would not include these So if your mortgage rate was 8.5% on February 29 and fell to 7.25% over the six months, the interest calculation would still take into account the original 8.5% at lower rates. calculation purposes,” said Adhil Shetty, CEO of Bankbazaar.com.

The ex gratia amount to which a borrower would be entitled would be a very small amount compared to the actual interest generated on the unpaid amount owed under the moratorium. “It is therefore essential that borrowers who have opted for the moratorium provision for their finances in the short term because the repayment will not have a significant impact. In this situation, it would be prudent, especially for borrowers with large contributions, to periodically make prepayments of principal to clear the additional debt accumulated due to the moratorium. Paying 120% of their deferred EMIs within 12 months of the last deferred EMI would help achieve this goal,” Shetty said.

Borrowers should also be aware of the impact on tax deduction related to home loans. “The interest deduction on the home loan will be reduced by the amount of relief the government will provide,” said Swar Pathak, a chartered accountant based in Ludhiana.

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