Credit Linked Subsidy Scheme for

First Time Home Buyers

APRIL 9, 2017

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 Month Interest Saving Present Value (at
9%) 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