This article is aimed at clearing out the doubts over how a bank calculates your NET pay while calculating the eligbility for total loan amount. Normally, all banks provide home loans upto 60 times your monthly NET pay.
Scenario
- You have a monthly in-hand (take home) salary as INR 50,000 and you are looking
for a home loan of about 30 lakhs.
- Your gross monthly income might be much more than INR 50,000 per month but that
does not matter while calculating the net pay.
- You don't have any other loan like car or personal on your name.
- Bank rules say that you are eligible to get 60 times your monthly NET pay as
loan.
Well, all sounds good till the time you are talking to your bank executive or an
agent over phone for your elibility. They ask you for your net pay, you answer 50K
per month and they immediately say that you are elgibile for a 60 times your monthly
net pay i.e. 30 lakhs of loan. You are excited that everything is going as per your
expectations and you will get the amount what you were looking for.
But things change dramatically when you have actually applied for loan by submitting
your documents along with salary slips and have paid the loan processing fees. The
bank will call you and evaluate your loan eligibilty once again and this time it
will come out to be much lss than what was communicated over phone. You start
wondering about what has changed? You salary slips still show the same 50K as net
pay and you don't have any other loan. Then how come the eligibilty has come down?
Is bank not interested in giving out that much loan or the rule of 60 times your net
pay is just a marketing gimmick? Read on to find out.
What is the catch in calculating NET pay?
The catch could be anything from a bank's marketing strategy to attract customers or
your low credit score. But most of the times, it is your salary components which are
play a spoilsport. You might be getting a net pay of 50K per month, but there are
some components which may not qualify for adding to your loan eligibility.
Normally, a salary is a total of following components:
- Basic Salary
- HRA (House Rent Allowance)
- LTA (Leave Travel Allowance)
- Medical Allowance
- Performance Bonus
- Conveyance Allowance
- Special Allowance - It could have different names in different companies like
city compensatory allowance etc.
- Food Coupons
- PF (Provident Fund) - Shown as a deduction in Salary Slip
- Any other allowance
A normal pay slip (1 month) in our example might look like this (I have taken all
sample values):
| Earnings | Amount | Deductions | Amount |
| Basic Salary | 15000 | Provident Fund | 1800 |
| Conveyance Allowance | 800 | Income Tax | 1250 |
| HRA | 7500 | | |
| LTA | 3500 | | |
| Medical Allowance | 1250 | | |
| Special Allowance | 25000 | | |
| Total | 53050 | | 3050 |
| NET pay | 50,000 (53,050 - 3,050) |
Now, the components which most banks do NOT consider while calculating your NET pay
are LTA and Medical Allowances. So, Even though your salary slips depict Rs. 50,000
as NET pay, bank will NOT consider LTA and Medical allowance as a money which would
be available with you for spending on loans i.e. they believe that you will actually
spend these LTA and medical allowances on the activities which they are paid for.
Hence, what bank will do is, they will deduct these amount from your pay slip NET
pay as follows:
| Net pay as per salary slip : | 50,000 |
| - LTA amount | 3500 |
| - Medical Allowance | 1250 |
| New Net Pay | 45250 |
Now, calculate your eligibility = 27,15,000 (45250 * 60)
Which is lower than earlier eligibility by about 10% i.e. 2,85,000.
Now, if you had planned your finances keeping in mind that you would get a loan of
30 lakhs by bank and manage other money yourself, you now would need to pool in
2,85,000 more.
I hope you would have understood the concept. I would urge you to keep these
calculations in mind and do not blindly believe what bank sales executive commits as
he is mroe interested in bringing a client to bank. You will get to know these
details only when you would have actually paid the non-refundable processing fees of
the bank. You would have no option but to go on with it and find out other ways of
financing the deficit amount.
Comments, suggestions and queries are most welcome.
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