Few banks provide home loans with a linked current account. Any balance kept in this current account earns the same rate of return as that of your home loan. So this effectively brings down your outstanding home loan balance with the bank. You save on the interest cost.
As an example, you have a 50 Lakhs home loan @ 8.5% with say SBI. They allow maxgain accounts that are linked to the home loan account. If you keep 5 Lakhs in the maxgain account, the home loan interest would be charged on net outstanding 45 Lakhs only.
Normally most families keep a working capital of couple of lakhs in a savings bank account.
Besides, most families maintain 6 months worth of emergency corpus in liquid Mutual Funds or FDs.
Additionally, high net worth families always maintain a significant part of their wealth in defensive debt mutual funds in alignment with the asset allocation.
Now, all the above liquid investments can be parked with the home loan linked current account.
Since the balance is netted here with the outstanding home loan, there is no credit entry of interest earned in your bank account. So technically, no income. Hence no taxation.
Once you start parking all your surplus short term money here, this becomes an excellent cash flow tool. Without having to repay the loan, you can reduce the net outstanding balance of the home loan account.
Takes your one step further to pre-pay the home loan. One step closer to financial freedom.
SBI and Citibank have this product. SBI calls it a Maxgain account. Citi calls it a home credit account. PNB seems to have this with a cap of 20% of the total loan. There are possibly more banks offering this facility.
Kunjal and I are using Citi's home credit facility for our home loan, for 14 years now. Super happy.
I am sure you have questions in mind. So here are some thoughts:
Q: Would you recommend I shift my home loan to one of the banks giving such home loan linked current account?
A: Yes. Suggest you check out the benefits net of the porting costs.
Q: Is there a section or clarification from Income tax that interest earned on home loan linked current accounts is tax-exempt?
A: No. The tax benefit claimed on the home loan interest also comes down due to the net balance being charged. So logically it makes sense that the effective interest earned in the current account to be treated as tax-free. But we cannot say this with certainty. You should obtain professional advice from your chartered accountant.
Q: But this will reduce the tax benefits I get on the home loan.
A: Yes. We think that tax benefits maybe 30-35% but the rest is any way your cost. The liquid funds and FDs earn you < 5% if you are in a high tax bracket. Besides, most importantly, Financial freedom is a bigger goal, to our mind.
Q: Can your firm help us to port our existing home loan account to a new loan with such a linked current account?
A: No. We prefer sticking to advise. Our intent is to avoid getting into product distribution.
Q: But the banks charge higher for such current account linked home loans.
A: Yes. You can try negotiating a 0.25% higher due to this feature. If you are going to park as much money as possible, then the higher interest rate should not matter anyway. The net benefit analysis would help decide.
Q: I don't have a home loan.
A: Wow. Maybe you should share this tip with a friend or family member who has a home loan.