Credit Linked Subsidy Scheme for First Time Home Buyers

To promote affordable housing, the Government had launched Pradhan Mantri Awaas Yojana (PMAY) in 2015. Under PMAY, among other schemes, Economically Weaker Section (EWS) and Low Income Group (LIG) were to be given interest rate subsidy on their housing loans. The interest subsidy was to be provided under Credit Linked Subsidy Scheme (CLSS) under PMAY. EWS households are those with annual income up to Rs 3 lacs while LIG households have annual income between Rs 3 lacs and Rs 6 lacs.

The Prime Minister, in his speech on December 31, 2016, extended the scheme to middle income groups too. The proposal has been approved by the Cabinet on February 1, 2017. Home loans sanctioned after January 1, 2017 are eligible.

Credit Linked Subsidy Scheme (CLSS)

The benefit under CLSS is available to only first-time home buyers. If you already own a house, you cannot avail benefit under CLSS. CLSS is available for construction or purchase of new house. You can also avail the benefit under CLSS for addition of room, toilets, kitchen etc to your existing house.

1. If your annual household income is less than Rs 6 lacs per annum, you will get interest subsidy of 6.5% on principal of Rs 6 lacs. For instance, if your annual income is Rs 3 lacs and you take a home loan of 11 lacs at the rate of 9.5% per annum. You will pay a rate of 3% (9.5% – 6.5%) on Rs 6 lacs and an interest rate of Rs 9.5% on the remaining principal amount of Rs 5 lacs.
2. If your annual household income is between Rs 6 lacs and Rs 12 lacs, you will get interest subsidy of 4% on a principal of Rs 9 lacs.
3. If your annual household income is between Rs 12 lacs and Rs 18 lacs, you will get interest subsidy of 3% on a principal of Rs 12 lacs.

For the purpose of annual income, incomes of the entire household (self, spouse and unmarried children) will be considered.

How Is Interest Subsidy Calculated?

The working of the scheme is slightly different from what you would expect. It is NOT that you pay lesser interest every month on the subsidized loan portion while the Government bridges the deficit. As per the scheme, the Government through its nodal agencies (NHB and HUDCO) will transfer the subsidy amount to your home loan account directly. The subsidy will be transferred to your account upfront. This will effectively reduce your home loan amount.

To calculate upfront subsidy, the interest savings due to subsidy scheme is discounted at flat rate of 9% p.a. If the loan tenure is less than 20 years (increased from 15 years), then the actual loan tenure is considered to arrive at interest savings. However, if the loan tenure is greater than 20 years, the loan tenure of 20 years is considered for the purpose of calculation of interest rate subsidy. Therefore, to calculate the subsidy amount, you need to do the following.

1. Calculate EMI for subsidized principal (Rs 6 lacs, 9 lacs or 12 lacs as the case may be)
2. Use the interest rate subsidy (6.5%, 4% or 3% as the case may be) as rate of interest
3. For tenure, use lower of actual tenure or 20 years
4. Calculate the interest portion of the each EMI installment.
5. Discount the interest savings at 9% p.a. to present to arrive at the subsidy amount. The interest savings have to be discounted at a rate of 9% p.a. This is irrespective of the home loan interest rate.

Illustration

Loan Amount					2,000,000
Loan Interest Rate					10%
Loan Tenure (months)					120
For Subsidy Calculation
Principal (portion of loan that is subsidized)					600,000
Interest (interest rate subsidy as applicable)					6.50%
Tenor (minimum of Actual loan tenure or 240 months)					120
Discount rate					9%
Month	Interest Saving	Present Value (at 9%)	Month	Interest Saving	Present Value (at 9%)
1	3,250	3,226	61	1,886	1,196
2	3,231	3,183	62	1,859	1,170
3	3,211	3,140	63	1,833	1,145
4	3,192	3,098	64	1,806	1,119
5	3,172	3,056	65	1,778	1,094
6	3,152	3,014	66	1,751	1,069
7	3,133	2,973	67	1,724	1,045
8	3,113	2,932	68	1,696	1,020
9	3,093	2,892	69	1,668	996
10	3,072	2,851	70	1,641	972
11	3,052	2,811	71	1,613	949
12	3,032	2,772	72	1,584	925
13	3,011	2,733	73	1,556	902
14	2,991	2,694	74	1,528	879
15	2,970	2,655	75	1,499	856
16	2,949	2,617	76	1,470	833
17	2,928	2,579	77	1,441	811
18	2,907	2,541	78	1,412	788
19	2,886	2,504	79	1,383	766
20	2,865	2,467	80	1,354	744
21	2,843	2,431	81	1,324	723
22	2,822	2,394	82	1,294	701
23	2,800	2,358	83	1,264	680
24	2,779	2,322	84	1,234	659
25	2,757	2,287	85	1,204	638
26	2,735	2,252	86	1,174	617
27	2,713	2,217	87	1,143	597
28	2,691	2,183	88	1,112	576
29	2,668	2,148	89	1,082	556
30	2,646	2,114	90	1,050	536
31	2,623	2,081	91	1,019	516
32	2,600	2,047	92	988	497
33	2,578	2,014	93	956	477
34	2,555	1,982	94	925	458
35	2,532	1,949	95	893	439
36	2,508	1,917	96	861	420
37	2,485	1,885	97	828	401
38	2,462	1,853	98	796	383
39	2,438	1,822	99	763	364
40	2,414	1,791	100	731	346
41	2,391	1,760	101	698	328
42	2,367	1,729	102	665	310
43	2,343	1,699	103	631	292
44	2,318	1,669	104	598	275
45	2,294	1,639	105	564	257
46	2,270	1,609	106	530	240
47	2,245	1,580	107	496	223
48	2,220	1,551	108	462	206
49	2,195	1,522	109	428	189
50	2,170	1,494	110	393	173
51	2,145	1,465	111	358	156
52	2,120	1,437	112	323	140
53	2,094	1,410	113	288	124
54	2,069	1,382	114	253	108
55	2,043	1,355	115	217	92
56	2,017	1,328	116	182	76
57	1,991	1,301	117	146	61
58	1,965	1,274	118	110	45
59	1,939	1,248	119	73	30
60	1,913	1,222	120	37	15
Subsidy Amount to be transferred to loan account					161,668

Therefore, your effective loan will become only Rs 20 lacs – Rs 1.62 lacs = Rs 18.38 lacs. You can also calculate the interest subsidy amount on Pradhan Mantri Awaas Yojana website. Therefore, you pay interest on Rs 18.38 lacs (and not Rs 20 lacs). And you pay the full 10% interest on Rs 18.38 lacs. If you keep the tenure constant at 120 months, EMI goes down by Rs 2,136 per month (Rs 26,430-Rs 24,293). This will result in interest savings of Rs 2.56 lacs over the loan tenure of 10 years. Do note that the level of subsidy, reduction in EMI or the number of EMIs depends on the input variables.

What If You Fall in the Higher Income Slab?

The method for calculation of interest subsidy remains the same. For instance, if your annual income is between Rs 12 lacs and 18 lacs,  you will be eligible for interest subsidy of 3% on the principal of Rs 12 lacs. So, if you have taken a loan of Rs 20 lacs for 20 years at 10%, you will get subsidy of Rs 2.3 lacs. Your loan amount does not affect the subsidy as long as the loan amount is greater than Rs 12 lacs (because interest subsidy is only for amount up to Rs 12 lacs). Even for loan amount of Rs 50 lacs, the subsidy will only be Rs 2.3 lacs. The subsidy amount will be lower if the loan amount is lower than Rs 12 lacs. In this case, your loan amount effectively goes down by Rs 2.3 lacs to 17.7 lacs. This will reduce the EMI by Rs 2,070. Over 20 years, this is result in absolute saving of Rs 4.96 lacs.

Points to Note

• Subsidy is credited upfront to the loan account of the beneficiary, effectively reducing the outstanding loan amount.
• The subsidy is available only to first time home buyers i.e. the family should not own a pucca house. The family includes spouse and unmarried children.
• There is no cap on the amount of loan. However, the subsidy will be limited to only a specific portion (Rs 6 lacs, Rs 9 lacs or Rs 12 lacs as the case may be).
• If you have taken the benefit under CLSS and are transferring your loan to another bank, you will not get the benefit again.

Conclusion

This is positive for many first time home buyers. There won’t be too many households in India with annual income of greater than Rs 18 lacs. I believe this will easily cover 90-95% households in the country. You also need to see this with the other tax benefits for repayment of housing loans (principal repayment under Section 80C and interest payment under Section 24). If you have been planning to purchase your first house, this benefit may just make you expedite your decision.

Source

1. Credit Linked Subsidy Scheme on National Housing Bank website
2. Pradhan Mantri Awas Yojana Website