How Subvention Schemes Simplify Property Buying: Benefits, Risks & Key Insights Buying Guide

Property Buying Made Easy? How Subvention Schemes Work in Real Estate

If you’ve ever browsed real estate projects or heard about flexible payment plans like 10:90, 20: 80, or 30:70, you’ve likely come across the term subvention scheme. While these schemes may sound like an easy way to own property, they come with important terms and conditions that every homebuyer must understand.

In this blog, we’ll decode what subvention schemes mean, how they work in real estate, and their financial implications for homebuyers. This guide is designed to help you make informed decisions and avoid common pitfalls when choosing these payment plans.

What is a Subvention Scheme?

A subvention scheme is a payment plan offered by developers in partnership with banks. It allows buyers to pay a small percentage of the total property price upfront, while the bank disburses the remaining amount to the developer in stages as the construction progresses. Here, the developer agrees to bear the Pre-EMI (Equated Monthly Installments) until the property is ready for possession.

In simple terms, the subvention scheme delays your financial burden by shifting the EMI payments to after you’ve taken possession of the property, making it seem more attractive to prospective homebuyers.

This arrangement is based on a tripartite agreement between three parties:

1. The Buyer (you)

2. The Developer

3. The Bank

The key feature of a subvention scheme is that the developer bears the cost of Pre-EMI (which is the interest component of the loan) until the property is handed over to the buyer. Ideally, under such agreements, the buyer’s EMI should only start after taking possession of the property, although some agreements may stipulate a fixed period for starting the EMI, regardless of project completion. Hence, it’s crucial to thoroughly read the terms and conditions of this agreement to know who pays what and when.

How Do Subvention Schemes Work?

Let’s break down the working of a subvention scheme with an example. Imagine you're purchasing a property that costs ₹1 crore. Under a typical subvention plan:

• You make an initial down payment of 10% of the property price, i.e., ₹10 lakhs.

• You also pay additional charges such as GST, stamp duty, and registration fees, which might amount to approximately ₹12 lakhs.

• The remaining 90% of the property value, i.e., ₹90 lakhs, is covered by a home loan from a bank, which disburses the money to the developer in installments as the project progresses.

Key Features of a Subvention Scheme:

1. Delayed EMI Payments: Under this scheme, the developer pays the Pre-EMI (interest on the loan) on your behalf until you get possession of the house. This reduces your immediate financial burden, as you start paying the full EMI only after you get the keys to your new home.

2. Tripartite Agreement: A subvention scheme requires a three-way agreement between the buyer, the bank, and the developer, ensuring each party’s obligations are clearly defined.

3. Progress-Linked Disbursements: The bank releases funds to the developer at specific stages of construction. For example, a percentage of the loan is released when the foundation is laid, another portion when the structure is completed, and so on.

4. Home Loan Eligibility: To avail of this scheme, you need to qualify for a home loan for the remaining value of the property. In the example above, you would need to be eligible for a loan of ₹90 lakhs.

Pros of Subvention Schemes

1. Reduced Financial Pressure: One of the biggest advantages of a subvention scheme is that you don’t have to start paying EMIs right away. This helps manage your finances, particularly if you are paying rent while waiting for your home to be ready.

2. No Double Burden: For those who are renting a home while waiting for their new house to be built, subvention schemes prevent the double burden of paying rent and EMIs simultaneously.

3. Attractive for Investors: For real estate investors, subvention schemes allow them to delay paying EMIs, which helps them manage their money more easily.

Cons of Subvention Schemes

1. Higher Property Price: Developers usually charge a higher price for properties sold under subvention schemes. While the option to delay EMI payments sounds appealing, you might end up paying more for the property than with other payment plans.

2. Possession Delays: If the construction of the property is delayed, you could face a situation where the developer stops paying the Pre-EMI, but you haven’t yet taken possession of the property. This is why it’s crucial to ensure that the agreement specifies the timeline for when EMIs start and who will be responsible for payments in case of delays.

3. No Early Tax Benefits: While the Pre-EMI payments made by the developer qualify as interest under section 2(28A) of the Income Tax Act, you can only claim a tax deduction under section 24 of the Income Tax Act on the interest component of your home loan after the project is completed. This means that during the construction period, you miss out on any potential tax benefits.

What are the Tax Benefits of Subvention Schemes?

Although the developer bears the Pre-EMI during construction, the interest qualifies as an interest expense under section 2(28A) of the Income Tax Act. Under section 24 of the Income Tax Act, you can claim a tax deduction on the interest component of the loan, but only after the project is completed.

Let’s clarify this with an example:

• Suppose the total interest you will pay on your home loan is ₹10 lakhs.

• You can claim a tax deduction on this amount, but only after taking possession of the property.

So, while subvention schemes offer the convenience of delayed payments, you should be aware that the tax benefits can only be realized post-completion, which might delay any immediate financial relief.

Subvention Schemes and Legal Aspects

Since subvention schemes are structured around tripartite agreements, it’s essential to review the contract carefully. Here are some points to watch out for:

• Pre-EMI Terms: The contract should clearly state that the Pre-EMI will be borne by the developer until possession. If the developer sets a fixed period (instead of possession), you may end up paying the EMIs even if the project is delayed.

• Loan Eligibility: Ensure that your home loan eligibility aligns with the remaining value of the property, as this could affect your ability to participate in the subvention scheme.

• Possession Delays: Confirm the timeline for project completion and possession in the agreement to avoid future disputes.

Conclusion: Is a Subvention Scheme Right for You?

Subvention schemes can be a great option for homebuyers who want to manage their immediate financial burden or for investors looking for flexible payment plans. However, the higher cost of property, potential delays in possession, and lack of early tax benefits should be considered before opting for such schemes.

It’s always a good idea to consult with a financial advisor or legal expert before signing a subvention scheme agreement to ensure you fully understand the financial and legal implications. Also, compare the total cost of the property under different payment plans to determine whether the benefits of a subvention scheme outweigh the costs.

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