Interest on interest waiver on loan moratorium – Eligibility and cashback calculation

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Recently Government announced the Interest on interest waiver on loan moratorium benefit for those who have loans before the Covid pandemic. Who are all eligible for this waiver benefit and how much you can benefit?

Interest on interest waiver on loan moratorium

Due to covid-19, many loan borrowers were not able to pay their EMIs due to lockdown, pay cuts, or job loss. Govt of India has taken the decision to provide a moratorium of EMIs on loan for 3 months from Mar-2020 to May-2020 which was later extended for another 3 months from Jun-20 to Aug-2020. During this period, loan borrowers who availed loans can request for a moratorium and need not pay EMIs. However, there would be interest on the interest that was imposed by banks and financial institutions. This seems there is no such big respite for the borrowers.

Hence, to give a big relief to all borrowers, the Government announced the waiver of COMPOUND interest during this moratorium period on your outstanding loans.

Interest on interest waiver on loan moratorium – Eligibility

Now let us see the eligibility for this Interest on interest waiver on loan moratorium.

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# This benefit is available for all those who availed of the moratorium or NOT. Hence, it is cheerful news for those who paid regular EMI and for also who opted moratorium benefit during those 6 months.

# Loan Types eligible for Loan Moratorium Interest Waiver Benefit

  • Home loans
  • Consumer durable loans
  • Educational loans
  • Auto loans
  • Personal loans
  • Professional and consumption related loans
  • MSME Loans
  • Credit card dues / EMIs converted through credit card dues

# The maximum loan oustanding should be not more than Rs.2 Crore.

# The loan should not be under NPA (Non Performing Assets) with bank as on 29th February 2020.

# The loan should be active as on 29th February 2020.

# Lenders may be private banks, public sector banks, co-operative banks or regional, rural banks, all India Financial Institutions, NBFCs or Housing Finance Company.

# The computation of simple interest amount would be based on the loan outstanding as on 29th February 2020.

# As per this scheme, for these 6 months starting from 1st March 2020 to 31st August 2020, the simple interest is calculated on the outstanding principal as on 29th February 2020. The difference between the compound interest and simple interest will be credited back to the borrower.

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# This benefit is available for those who closed the loan during the moratorium period.

# You will receive this benefit by 5th November 2020. Hence, if the amount is not credited, then approach the bank.

# Few are claiming that the benefit that we receive due to this Government announcement is taxable income for you and you have to pay the tax on it as per your tax slab. However, as far as I know, this your spending which you saved rather than an income. Hence, my understanding is that there is no tax on such savings.

Interest on interest waiver on loan moratorium – How much cashback you will get?

Let us take an example. Assume that you have a home loan of Rs.50 lakh and the interest rate is 8%.

In that case, the simple interest for 6 months is Rs.2,01,643

(Simple Interest = 50,00,000 * 8% * 6/12 = Rs.2,01,643).

The compound interest for 6 months is Rs.2,03,363.

(Compound Interest = 5000000*((1+8%/12)^(12*0.5) -1) = Rs.2,03,363

The difference is Rs.1,720.

You see that the difference is not much as it is the interest on interest is ONLY exempted. But you still end up in paying the interest for 6 months.

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Conclusion:-Even though it looks like a big relief, when you do your own individual calculation, it may not be more than Rs.5,00,000 benefit. Also, as few are mentioning that such saving on interest on interest waiver is added to your income and taxed as per your tax slab (which I completely say it is not the case like that), then your post-tax benefit will again get reduced. To me, it looks like an EYEWASH.

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Basu Nivesh
Basav is a SEBI Registered Investment Adviser (SEBI RIA) practicing the Fee-Only Financial Planning Service. He is a CFP (Certified Financial Planner) and blogger at Basu Nivesh. He services around 300+ satisfied clients.
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