Credit Linked Subsidy Scheme-Big Buck Saver on Home Acquisition & Construction

A couple of years ago, buying a home remained pretty much in the dreams and were a far distant reality for most. The housing prices, along with the interest rate were well beyond the reach of the masses. However, in a span of just over a year, some interesting developments have taken place in the real estate space and the home finance segment, which has made the acquisition or construction of houses a lot easier. The demonetization was a shot in the arm for realty investors, taking out the black money portion away from the real estate market and in the process removed a lot of fraudulent builders. This has resulted in the home prices softening. The demonetization led to a massive deposit surge across the banks, giving them the headroom to initiate the rate cut exercise which is still on even though the last three monetary policy stance of the RBI have been neutral.

The home loan rates have come down to 8.35%-8.80% per annum, falling from the level of 9.30%-9.80% about a year back. But what has broadened the reach is the government’s big bang release of Credit Linked Subsidy Scheme in March 2017. The Prime Minister Narendra Modi, on the eve of New Year, had already hinted about such a scheme, triggering widespread speculations among the experts on the home loan interest rate under the government- sponsored scheme. However, the actual details of the scheme were yet to be worked out. So, let’s start discussing Credit Linked Subsidy Scheme (CLSS) here and find out its benefits.

Components of CLSS

CLSS is the part of the Pradhan Mantri Awas Yojana (PMAY) designed in a way to provide shelter to everyone by 2022. The subsidy scheme applies to households, with an income of ₹3 lakhs to 18 lakhs in a year, looking to buy or construct their first house on a home loan. The maximum loan tenure is upto 20 years if you apply under PMAY scheme. The government has allocated the subsidy based on three different income groups. Depending on the income group you fall under, the subsidy will vary.

(1) CLSS-LIG/EWS- This component puts in place the households having a yearly income of ₹3 lakhs to ₹6 lakhs. A subsidy of 6.5% on a loan amount of upto ₹6 lakhs is likely to be granted, while the amount exceeding the limit will bear a charge of normal interest rate.

Example- You applied for a home loan of say ₹10 lakhs to construct a home under PMAY scheme. Suppose the lender offered a normal interest rate of 8.65% and a tenure of 20 years to pay off the loan. In that case, a subsidy of 6.5% will apply on ₹6 lakhs while the remaining amount of ₹4 lakhs to be serviced at 8.65%. If that is the case, the total EMI and interest outgo would be ₹6,587 (3,078+3,509) and ₹5,80,723 (1,38,746+4,42,247), respectively, greatly reducing from an EMI of ₹8,773 and interest of ₹11,05,617 if you go without subsidy.

(2) CLSS MIG-I- Households with a yearly income of more than ₹6 lakhs to ₹12 lakhs feature under CLSS MIG-I scheme. For these households, the government has set a subsidy of 4% on a loan of ₹9 lakhs. The loan amount above the said limit will be charged at a normal rate of interest.

Example-You earn about ₹9 lakhs in a year and wish to buy a home. On an application seeking a home loan of say ₹28 lakhs for a 20-year period, a lender gave you an interest rate offer of 8.55% p.a. But since the application was made to avail the benefits of the PMAY scheme, the lender would have to calculate the EMI and interest liability based on the subsidy due on the same. At a subsidy of 4% on a loan worth ₹9 lakhs and the remaining ₹19 lakhs at the normal rate of 8.55%, the EMI appears to be ₹22,267 (5,718+16,549) while the interest outgo stands at ₹ 25,44,075 (4,72,359+20,71,716). When you make a calculation without taking subsidy into consideration, the EMI and interest would be at ₹24,388 and ₹30,53,056. So, you can see a savings of ₹2,121 and ₹5,08,981 in terms of EMI and interest repayments, respectively.

(3) CLSS MIG-II- Under this component, it’s the households having an annual income of above ₹12 lakhs-18 lakhs will become the beneficiary. An 3% interest subsidy on a loan of ₹12 lakhs is waiting for them to avail at a lending institution offering a home loan under PMAY. The loan above ₹12 lakhs will carry a normal interest rate.

Example- Your annual income stands at ₹15 lakhs. You applied to a PMAY-backed home loan of ₹45 lakhs at a bank offering a normal interest rate of 8.60%. The maximum tenure granted is 20 years in your case. With subsidy, the EMI and interest would come down to ₹37,170 (8,323+28,847) and ₹44,20,786 (7,97,417+36,23,369). However, the very same loan will put before you a higher EMI of ₹39,337 and an interest repayment of ₹49,40,958 in the absence of any subsidy.

So, you are updated with Credit Linked Subsidy Scheme with facts and examples in the best way possible. The interest rate environment at the moment is favourable and look all set to ease further. You can either apply for PMAY scheme now or wait for a couple of months to do the same. PMAY is undoubtedly clearing out the way for a smooth home acquisition or construction.