Pradhan Mantri Awas Yojana for India’s home loan sector

By Vanshika Kumari

Towards the end of 2016, Prime Minister Narendra Modi announced the Pradhan Mantri Awas Yojana (PMAY). Its primary objective was to facilitate affordable housing for everyone, so as to achieve the vision of ‘housing for all’ by 2022. Although it may appear to be a distant dream or a difficult task, the government has already started garnering partnerships with many of the leading builders and developers, as well as financing institutions such as banks and non-banking financial companies (NBFCs). Additionally, it has proposed various plans across the nation to provide reasonable housing to middle and lower-middle class households. These homes are considered to be around 300 sq. ft. in any of the four metro cities, or 600 sq. ft. in any non-metro area.

Great leaps for the home loans

Compared to the last few years, the number of factors contributing to the home loan sector in India is rising. Some of them are notable since they have been recently introduced, and have impacted significantly on the realty market. India’s real estate sector has not witnessed any growth for many years and instead, has been dull. However, the introduction of PMAY, facilitating affordable housing, has contributed largely to the increasing number of home loans being sanctioned by various financial institutions. HDFC Bank has already reported a significant rise in sales figures for home loans in the first quarter. The bank has sanctioned over thousands of home loan applications since the beginning of this year. Given the various changes in the Indian economy after demonetisation, it is thus, essential to understand these factors that are taking home loan sales to higher peaks.

A shiny new scheme in the making

The Pradhan Mantri Awas Yojana scheme has introduced the Credit Linked Subsidy Scheme (CLSS) for Middle Income Groups (MIG). Thus, a borrower can take advantage of the subsidy to save over Rs. 1,000 or 2,000 on EMIs. This scheme entitles those who are in the middle-income group (buying a house for the first time) to be eligible for an interest subsidy, based on their loan amount and annual income.

This subsidy amount is collected by the lender from the government, and not the builder or the developer, which allows him to claim for a refund. Under this scheme, individuals who are taking a home loan up to Rs. 9 lakh and earning up to Rs. 12 lakh per year are eligible for a 4% subsidy. Further, individuals who are taking a home loan up to Rs. 12 lakh and earning up to Rs. 18 lakh annually are eligible for a 3% subsidy.

The borrower is eligible for tax benefits under the Section 80EE of the Income Tax Act, 1961. Income tax deductions up to a maximum of Rs. 1 lakh for a financial year, can be claimed. Under Section 80C, tax deduction on principal repayment for interest on the home loan can also be exacted. Additionally, the builder or the developer’s profit is exempted from tax for the next five years starting from 2016, only being applicable for those who enroll in this scheme to build affordable homes.

Affordable housing all the way

Following the popularity of the home loan interest subsidy, developers and builders have started realising demand and supply ratios for affordable home loans, which are turning out to be profitable. Instead of creating luxurious living spaces that might take a longer period of time to sell, building affordable homes are more gainful since a majority of the borrowers are from middle-income groups looking for economical homes. Also, these homes can be built faster and more in number for a comparatively lesser space than most of the other projects.

Positive news from financial ends

Most banks and NBFCs are affirmative regarding the subsidy and agree that affordable houses are indeed, contributing to the increasing number of home loan applications. Many financing institutions as well, are predicting that the home loans segment would grow to 25%, subject to the subsidy’s availability. Moreover, these financing institutions are not losing any money under the scheme as it is funded by the government. The government has also asked the financing institutions to promote the availability of CLSS for the middle income demographic across various mass media channels.

A case for rent

Considering the increase in rental yields in the past few years, individuals are now finding that purchasing an affordable house is more convenient than paying a high rental amount for the same. Depending on the amenities, locality, and other factors, the cost of an EMI for a home loan might turn out to be cheaper than paying rent for a house every month. Furthermore, the Budget 2017 has set a maximum limit of Rs. 2 lakh for tax deductions on a rented house. Based on the inclination of buying a house based on income and other aspects, an individual might easily buy an economical home. Most financial institutions’ lists have approved housing projects in different parts of India and also provide an option to have a co-signer, which makes it easier to apply for a home loan.

Photo by CafeCredit under CC 2.0