Saturday, February 6, 2010

Loan Payment Affordability - Update

This post is an update to my blog entry dated December 9, 2009.  Now that the placement season at ISB is truly underway, I thought this was an apt time to reevaluate the monthly loan payments as a percentage of the total salary.

During the past few months I have been constantly interacting with my future classmates, current ISB students and recent alums. Several facts have come to my notice, because of which, I am modifying the assumptions I used as part of my previous analysis.  

Based on my discussions with current students, a salary of Rs 14,00,000 is considered a "good" package on campus. Also, thanks to several people of google groups, I learned that many offers were made in the Rs. 10-12,00,000 range. These figures are substantially lower than the Rs. 19,00,000 I had assumed in my previous analysis.  Therefore, as part of this analysis, I looked at three (3) different scenarios which are presented below. 

Common Assumptions (left unchanged)

Loan Amount = Rs. 18,00,000 (assuming the deposit was paid out of pocket)
Interest Rate - 10.5% (Source: UBI - ISB website)
Term - 7 Years
Therefore, Installment = Rs 30,500/month or Rs 3,66,000/year
Interest Paid during 1st yr = 15,000/month or Rs 1,80,000/year
Tax Bracket = 30%
Deduction = Rs 4,500/month or Rs. 54,000/year
Net installment = Rs 30,350 - Rs 4,500 = Rs 26,000/month or Rs 3,12,000/year
Take home salary = 62% of CTC

Salary Assumptions:

Scenario 1 - Great (in most cases)

Average Salary - Rs 19,00,000 (CTC)
Take-Home = Rs 95,000/month or Rs 11,40,000/year
In-Hand (after loan payment) = Rs 95,000 - Rs 26,000 = Rs 69,000/month or Rs 8,28,000/year

Scenario 2 - Reasonable (in most cases)

Average Salary - Rs 14,00,000 (CTC)
Take-Home = Rs 72,000/month or Rs 8,68,000/year
In-Hand (after loan payment) = Rs 72,000 - Rs 26,000 = Rs 46,000/month or Rs 5,52,000/year

Scenario 3 - (no comments)

Average Salary - Rs 11,00,000 (CTC)
Take-Home = Rs 57,000/month or Rs 6,82,000/year
In-Hand (after loan payment) = Rs 57,000 - Rs 25,850 = Rs 31,000/month or Rs 3,72,000/year

Of course, these numbers change drastically if the loan amount was low. For example, a person making Rs 14,00,000 with a Rs 10,00,000 loan would have approximately Rs 58,000 left after paying the monthly installment. These numbers are personally disappointing to me. However, I console myself by reading Sanjeev's post and reminding myself that I am doing this for the long term.


  1. NOTE:

    Long term yes...

    1. The scenarios presented here will be at most for 1 to 1.5 years. after which you should get a salary increase (and if you dont expect to, well dont come to ISB!!!)

    2. In most cases (not all) the lower salary will be with someone wilh lesser workex (hence blessed with more working years, everyone is bright by default). Practically speaking the cost of living would be lower for the young someone too (considering normal spending ppl!)...

    So loan looks like a viable option.

    P.S. of course we could have another crash meanwhile but then that is a risk we are willing to take for good education, arent we?

  2. If you think education is costly, think about ignorance!


  3. gautham,

    Ignorance might be costly, but at least it is bliss :)

  4. yup ignorance is bliss...

    its just something mushy till you explore and realize that its shit you stepped on...

  5. You missed out tax rebate on eduational loan. :) lol..

  6. @GP - Nope, I did not. Its under common assumptions.

    "Tax Bracket = 30%
    Deduction = Rs 4,500/month or Rs. 54,000/year
    Net installment = Rs 30,350 - Rs 4,500 = Rs 26,000/month or Rs 3,12,000/year"

  7. Nadeem,

    I have done these calculations a little differently.

    Annual CTC - 20L (includes all fixed, variable, taxable,non-taxable portions & fringe benefits)
    Loan amount - 18L
    *Non-taxable components of salary - 20% of CTC
    House Rent = 2L

    Calculations (Annual)
    a)Earning - 20L
    b) Average Education loan Principal during initial years - 2.5L
    c) Average education loan interest - 1.5L
    d) Household expenses - 6L
    e) 80C investments - 1L
    f) Holidays & entertainment - 1L
    Taxable income = 0.8*20L - sum(c+e)- House Rent = 11.5L
    g)Tax on income = 0.3*(11.5-5)+54k = 2.5L

    Net Income left Anually = a - sum(b+c+d+e+f+g)= 5.5L (or a saving of around 45k/month)

    This is a rough estimate of what we'll be left with anually post ISB.
    The values taken in Assumptions & Calculations are variables and can be changed according to personal choices

    * Generally in India, 20% of salaries are given out as non-taxable portions which include various re-imbursements, fringe benefits & LTA.

  8. Rachit,

    Thats a great breakdown. Two things that I wanna mention.

    The starting salary you assumed (Rs 20 Lakhs) will probably not apply to the majority of the class. Leaving out the extremes and assuming an average of 14 lakhs, then the numbers change drastically.

    Also, shouldnt the rent be included in the 20% non-taxable part of the CTC?

    In my opinion, a person making 20 lakhs has little to worry about. Its the lesser mortals (read me) that should be concerned about the repayment and lifestyle.

  9. Nadeem,

    You're right. Most of us would end up around 14L, so its more relevant to look at numbers around this. But if we earn around 14L, we'll have to live life more frugally and hence our expenses need to go down. So i'll do the calculations a little differently for 14L and arrive at what we will have at our disposal for household and entertainment expenses which I have taken as 7L when we earn 20L

    Annual CTC - 14L (includes all fixed, variable, taxable,non-taxable portions & fringe benefits)
    Loan amount - 18L
    Non-taxable components of salary - 20% of CTC
    House Rent = 1.5L
    Annual savings = 20% of CTC (As recommended by Financial planners)
    Calculations (Annual)
    a)Earning - 14L
    b) Average Education loan Principal during initial years - 2.5L
    c) Average education loan interest - 1.5L
    d) Annual savings (including 80C investments) - 2.8L
    Taxable income = 0.8*14L - 1L (80C) - (c)- House Rent = 8.7L
    e)Tax on income = 0.3*(8.7-5)+54k = 1.65L

    Net income for Household & entertainment= a-sum(b+c+d+e)= 5.5L/annum (including some liquidity that you might want to maintain)

    If you happen to take other loans such as auto loan or a home loan, then your life is bound to become very difficult. Ofcourse all this is indicative.

    As for House rent being a part of non-taxable portion, it won't be because house rent actually forms a taxable part of your salary structure but is subjected to tax deducation upon your producing certain proofs. If you don't, it will be taxed.
    When I say non-taxable parts, i mean those parts which wouldn't be even considered by the company accountants in your tax computations.