PMAY Subsidy: A Mixed Bag for the Economy

PMAY Subsidy: A Mixed Bag for the Economy

Last Updated: Tue, Feb 21, 2017 15:31 hrs
Real Estate (Reuters image)

Prime Minister Narendra Modi, on 31 December 2016, announced two new subsidy schemes to cheer up the real estate sector and achieve housing for all by 2022. But it’s only recently that the details of the two schemes under the Prime Minister Awas Yojana (PMAY) were revealed. Under the new schemes, if your annual income is up to Rs18 lakh, your first house would cost about Rs2.4 lakh less. As of now, the subsidy is available to only those earning up to Rs6 lakh per annum.

First time home buyers will get the subsidy at different rates depending upon their income bracket. People who earn less than Rs6 lakh per annum, will get a 6.5 percentage point subsidy on a Rs6 lakh principal component, irrespective of their loan amount. For instance, if you borrow money at a 9% interest rate, you’ll have to pay only 2.5% interest on Rs6 lakh and 9% on the balance. The subsidy for those earning up to Rs12 lakh per annum will be 4 percentage points on Rs9 lakh principal component, and 3 percentage points for those earning up to Rs18 lakh annually on Rs12 lakh principal component.

Income category
Loan amount considered
Interest subsidy (% points)
Reduction in EMI
Net savings on interest
Up to ₹6 lakh
₹6 lakh
6.4
₹2,219
₹2,46,625
Up to ₹12 lakh
₹9 lakh
4.0
₹2,158
₹2,39,843
Up to ₹18 lakh
₹12 lakh
3.0
₹2,200
₹2,44,468

Why is it good

On a 20-year term, at 9% interest rate

Assuming that the interest rate is 9%, the net benefit across all three categories over a 20-year period would be Rs2.4 lakh approximately. For the buyer, the monthly instalment will reduce by around Rs2,200. This will certainly bring cheers to the average borrower who will now have to pay less on both principal and interest on their home loans.

What it may not be good

While housing for all is a noble idea for a welfare state, someone has to pay for the subsidy doled out by the government. Even if it’s in the form of a state-owned banking system, the money has to be recovered. And the same, it can be safely assumed, will be charged to the taxpayer. Now the question is why should a taxpayer pay for the home ownership subsidy?

There is a fair bit of apprehension in the markets. The added expense for the government, is of course, a major concern. For instance, during the first phase of the same PMAY scheme, Rs310 crore was extended in subsidies for 18,000 first time home buyers from the lower income group. This amount was compensated by taxpayers. The amount will increase exponentially once the thousands of new first-time buyers are added to the scheme.

Impact on home insurance premium

These are early days of the scheme and prima-facie there’s unlikely to be a change in the home insurance premium in the immediate future. With home loan EMIs being more affordable, consumers may just buy property insurance which is still a largely underdeveloped sector in the Indian insurance market.

Naval - Goel is Founder & CEO PolicyX.com



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