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.

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