On Saturday, the government announced the exemption of compound interest on specific loans for a period of six months. Tax experts are not very happy with the plan. They believe that this scheme is useless as the net savings for a taxpayer are too small. The plan is called “Plan for granting ex gratia payment of the difference between compound interest and simple interest for six months to borrowers in specific loan accounts (1.3.2020 to 08.31.2020)”. Under the scheme, borrowers must pay simple interest on their loan amount during the six-month period between March and August against compound interest. Borrowers who have paid their installments on time will receive a refund from the lenders equal to a sum of “compound interest paid – simple interest.”
Let’s look at some calculations. For example, on a home loan of ₹25 lakh with an assumed interest rate of 8%, the net saving for a taxpayer would be ₹1,157. Similarly, in a home loan of ₹2 crore, the taxpayer would save a measly sum of ₹13,400. (See the table below for mathematical details.)
“Looking at the calculations, we can say that the net savings for an individual taxpayer are very meager. The scheme hardly provides any relief in the current pandemic,” says Pradeep Kasthala, Partner – Tax and Regulatory Services, BDO India.
How much do borrowers save under the government compound interest exemption scheme?
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The illustrations above show that savings for a borrower range from a few thousand to a maximum of ₹21,550 for a loan amount of up to ₹2 crore, with assumed interest rates. Any borrower whose total loans are greater than ₹2 crore will not be eligible for ex gratia under this scheme. Also, loan accounts should not be delinquent assets (NPA) as on the date mentioned above.
Specific loans that are eligible under the scheme include loans for MSMEs, education loans, home loans, consumer loans, credit card installments, auto loans, personal loans to professionals, consumer loans.
Lenders must credit the difference between compound interest and simple interest to eligible borrowers by November 5.
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