Like every year, real estate developers have started queuing up with deals and festive offers that may continue well into March next year. These offers include cash discounts, waiving of charges for a club house or location, discounts in the form of freebies such as modular kitchen, cars or gadgets, and subvention schemes. While you may consider one of the offers if you find it suitable, you should be wary of subvention schemes even if they look attractive. There’s a catch in these schemes you may not realize immediately.
In fact, in July this year, the National Housing Bank (NHB) advised housing finance companies to desist from tying up with builders to provide loans for projects offering subvention schemes. The Reserve Bank of India issued similar advice to scheduled commercial banks way back in 2013.
However, some real estate developers are back with subvention schemes this year. For example, Mumbai-based developer Sheth Group has announced a “subvention scheme" on its luxury apartment project “Sheth Zuri", located in Thane West, Mumbai. Under the scheme, “Go-Easy Deal", homebuyers are required to pay just 5% of the property value at the time of booking. During the period of construction, the developer will pay the interest on the home loan. In fact, if you explore real estate portals, you will find that there are many other developers who are offering such scheme across the country. For instance; on Magicbricks.com, Panchsheel Group is offering the scheme “no EMI till possession" in their “Panchsheel Greena II" project in Greater Noida West, Uttar Pradesh. Similarly, Sobha Developer is also offering no EMI till possession in their project “Sobha City" in sector 108, Gurgaon, Haryana. Under the scheme, these developers offer homebuyers to pay just 5% and 10% respectively of the property value at the time of booking the apartment.
How they work
Under subvention schemes, the developer, typically, keeps the initial payment or down payment low, usually 5-20% of the property value, so that the deal looks easy on the pocket. The remaining amount is to be paid at the time of possession.
When you buy an apartment under a subvention scheme, you pay the initial amount, and the bank pays the loan amount to the developer, according to the construction stage, while the interest portion on the loan disbursed is paid by the developer.
Homebuyers benefit because they don’t need to pay interest on the home loan till the time the property remains under-construction or for the period agreed upon. Developers, too, benefit, as such a scheme increases the saleability of the project. Also, the interest rate applicable on a home loan is much less than the rate on any other loan the developer may need to take to fund the project. “Liquidity isn’t there in the (real estate) market right now. These (subvention schemes) are good options for developers to boost sales. Also, home loan interest rates are around 8.5%, whereas any other loan the developer takes will charge at least 12% or more," said Samantak Das, chief economist and head of research,at JLL India, a real estate consultancy firm.
On the face of it, subvention schemes look attractive, especially for those who want to start paying EMIs only after they get the possession of the house, but there are disadvantages you may tend to ignore.
High cost: Remember that nothing comes for free. Projects that offer subvention schemes are generally priced higher than others in the vicinity. In fact, in many projects, developers offer separate rates for the same apartment to homebuyers who opt for a subvention scheme and those who don’t. The idea is to increase the per sq.ft rates of the apartment to cover the developer’s expenses—for paying the interest on the home loan on the buyer’s behalf—to some extent.
“One should do his/her homework and calculate every component in terms of pricing. It is advised that a buyer calculates the last per sq.ft price with and without the offers to conclude the deal," said Samir Jasuja, founder, PropEquity, a Gurgaon-based real estate, research and analytics firm.
Impact on credit score: Usually, developers tie up with various lending institutions to finance such schemes. For instance, Sheth Group has tied up with ICICI Bank to offer the subvention scheme.
During the financing process, typically, a tri-party agreement is executed between the homebuyer, the developer and the lending institution. The buyer pays the down payment, the lender agrees to make further payments to the developer, and the developer agrees to pay the EMIs on behalf of the borrower till possession or till the time specified in the agreement.
Under such arrangements, the actual borrower remains the homebuyer. So if there’s any default in payment by the developer, it will be you, the homebuyer, whose credit rating will get affected.
No tax benefit: According to the Income-tax Act, 1961, a borrower can claim deduction under Section 80C against principal repayment of a home loan, up to an overall limit of ₹1.5 lakh, and under Section 24 (b) against payment of interest up to ₹2 lakh, for a self-acquired house. Tax benefit can be claimed only when the borrower gets the possession of the house. Also, the interest paid during the construction period can be claimed as deduction in five equal instalments, starting from the year of possession; the principal repayment during the construction period can’t be claimed as deduction.
This benefit, however, may not be applicable if the developer pays the interest on your behalf under the subvention scheme. “Interest paid by the developer under the subvention scheme cannot be construed as borne by the buyer, hence, it would be difficult for the buyer to avail a deduction in respect of the same," said Neha Malhotra, executive director, Nangia Advisors (Andersen Global), a chartered accountancy firm.
Contrary to that, payment of interest would be treated as the homebuyer’s income and it will attract tax. “As the amount of interest paid by the developer represents discharge of a buyer’s liability to the bank by the developer, it would be a benefit received by the buyer. Accordingly, the buyer’s total income for the year should include the amount of interest borne by the developer, as his income from other sources under Section 56 of the Act," said Malhotra.
Such schemes provide some financial leverage to homebuyers—they don’t have to spend a large sum of money upfront, and can escape paying both rent and EMI during the construction period. However, it’s important to consider the details carefully. “Complete due diligence must be done on the developer’s track record, past execution capabilities, completed versus under-construction ratios, project ownership arrangements and titles, among other things," said Jasuja. If you still want to go for a subvention or similar scheme, double-check the developer’s credentials.