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Q. I have taken a home loan of Rs1 cr and now I have around Rs 30 lakh as surplus cash. I want to reduce my loan liability. But the point is that i may require this cash by next year. I have been told about SBI MaxGain Home Loan Scheme, but it is not very clear. Kindly tell me about this scheme and whether it will be good for me to opt for this? — Sudarshan Kumra

A. Before proceeding further, let us understand a few basic concepts of banking.

What is an overdraft scheme

Banks provide such type of loans against the collateral (security against a loan) like property, FDs or any other assets. It is exactly like your credit card limit. You pay interest only on the withdrawn amount or used amount, but not on the overall limit. However, here in this case there is no feature called grace period or interest-free period. Interest charging starts as soon as you withdraw from OD. Let us say bank sanctioned you OD of Rs30 lakh. The next day you withdraw Rs5 lakh for some emergency then the interest will be payable only on Rs5 lakh but not on a whole sanctioned Rs30 lakh. Now, after a few days if you deposit Rs2 lakh to OD account, then the overall usage is Rs3 lakh (Rs5 lakh withdrawn-Rs2 lakh deposited=Rs3 lakh). Therefore, interest will be payable only on Rs3 lakh. You can withdraw the amount up to maximum sanctioned limit, i.e. in this case, up to Rs30 lakh.

Usually, such types of loans come in handy when you frequently receive some surplus amount. Because, in normal loans once you pay the excess surplus towards a loan, then your EMI will go down. However, you cannot get back the cash immediately. The reason is, you have to apply for a top-up loan. Once it is sanctioned and amount released, then only you can get the cash. But in case of ODs, you can withdraw it immediately and use it for emergencies.

Hence, the liquidity of surplus amount you have is more when it comes to ODs than other types of loans.

SBI MaxGain Home Loan is nothing but

SBI MaxGain Home Loan is nothing but the OD sanctioned to you. In this case, the collateral is your home loan. So whenever you have a surplus then you deposit it in this MaxGain account. This deposit is treated as repayment towards the outstanding loan amount. Interest on outstanding for that period reduced. Hence, the interest will be charged only on the Actual outstanding Principal=Outstanding Principal-Surplus parked.

Book balance

It is the difference of 

Drawing Power and Available Balance. 

Available balance

This is undisbursed amount (in case of Construction Linked Payment or CLP)+Any Parked Surplus+Accrued Interest. 

Drawing power

Drawing power is your outstanding balance. It is not the actual original loan amount sanctioned by the bank. It is the current outstanding. Hence, this is the actual outstanding principal balance. 

Points to remember

1. Your EMI and tenure of the loan will never change during the course of a loan tenure. It is fixed whether you park your surplus or not. Let us say currently outstanding is Rs 10, 00,000 and EMI is Rs 30, 000. You parked surplus amount of around Rs 5, 00,000 to MaxGain Account. So the Book Balance will be Rs 5, 00,000. Interest will be calculated on Rs 5, 00,000. SBI collects Rs 30, 000 EMI from you. You may all know that EMI includes Principal part and Interest part. However, this EMI includes the principal part towards Rs 10, 00,000+Interest part on Rs 5, 00,000 Book Balance+Surplus interest part. Surplus interest part arises because EMI is constant. Principal payment kept constant. However, the interest was calculated on Book Balance of Rs 5, 00,000 but not on the initial outstanding of Rs 10, 00,000. Therefore, this surplus interest part is kept in an available balance. This you can withdraw it at any point of time.

2. As I said above the interest rate is calculated on the account balance on daily base. However, it is debited on the monthly base.

3. Any surplus amount that you deposit in MaxGain Account is not treated as principal loan repayment. Hence, such deposit not considered for tax-saving purpose under Section 80C. In addition, the interest saved under parking the surplus will not be eligible for tax deduction under Section 24 B of the Income Tax Act.

4. This loan does not charge anything extra. Therefore, it is treated as a typical home loan of SBI.

5. The available balance amount can be used for any purpose using the ATM Card that the bank provides.

6. You can use the available balance amount for paying any type of utility bills, credit card payments, online shopping or register ECS for your investments like Mutual Fund. However, an available balance is the limit for these transactions.

7. If you use your MaxGain ATM card in other bank ATMs then they charge you for the first usage itself. Because, this is Over Draft facility. Hence, no free transactions are available for other banks ATM usage.

8. Special care in case of under-construction home loan of SBI Max Gain

In case of under-construction property, banks usually disburse the loan amount in parts. You have the option either to pay only the interest part of the disbursed loan amount or the actual EMI (which will be considered based on the sanctioned principal amount).

In case of SBI MaxGain you can opt for both the options and also park the surplus money. However, you cannot withdraw the surplus you deposited.