If you are planning to buy a flat in India, then you must have been seen hoarding of real estate projects where payment schemes like NO EMI TILL Possession (10:80:10 Payment Plan), BOOK NOW AND PAY LATER or NO EMI TILL 24 MONTHS has been mentioned. This type of scheme is called subvention plan in real estate. These schemes seem to be very lucrative because it saves home buyers from paying EMI and rent together.
But, as a home buyer you must have several questions about these schemes (or payment plans) like
Why is a developer offering such a scheme?
How much EMI do you need to pay after possession?
What will happen if the project gets delayed?
And, what are advantage and disadvantage of the subvention payment plan?
In this post, I will try to provide the solution to all the above questions.
The name “Subvention” is taken from Latin word “Subventus”, which means monetary help or support. If you are thinking that these schemes are launched with some divine intention to help home buyers then you are completely wrong. You should always remember that there is nothing comes for free in this world.
Let’s first understand the subvention scheme or payment plan with an example of 10:80:10.
In the subvention scheme initially, the buyer will have to pay small (10% of the total value of the property) booking amount. This amount will include registration fee, stamp duty, and GST. After that bank will pay 80% to the developer at various stages of construction. One 80% payment is completed buyer will have to pay 10% at the time of possession. Buyer’s EMI will start after possession.
In subvention payment plan real estate developer will have to pay interest till offer of possession. It can be possible that builder will bear interest for a limited period of time this is called EMI Holiday Period and it can be from 24 to 48 months.
Developers launch subvention payment plan in three forms.
Subvention Plan Type 1: In this type of subvention scheme homebuyer pays only 10-20% of total property cost at the time booking. The rest amount will be paid by the bank to the builder as a load under three-way agreements between the buyer, the developer, and the bank. The bank releases money at the different stages of construction. The buyers EMI begins only after getting possession.
Subvention Plan Type 2: the Second type of subvention scheme is a deferred payment agreement between buyer and developer. Buyer will have to pay 5-25% of total property cost at the time of booking. The rest amount will be paid at the time of possession. These payment plans come in various forms such as 30:30:40, 10:70:20 etc.
Subvention Plan Type 3: the third type of subvention scheme is called smart subvention scheme. Under his scheme If the entire payment from the bank has to be paid in 10 installments to the developer, then the 20% or so that the buyer has to pay is also paid in small installments of, say, 2%.
Subvention Scheme Are Banned By RBI
You should also note that subvention schemes (80:20 and 75:20) are banned by RBI on 3rdSeptember 2013. The reserve bank of India (RBI) had given three reasons for doing same which are given below
- Such housing loan products are likely to expose the banks as well as their home loan borrowers to additional risks e.g. in case of disputes between individual borrowers and developers/builders, default/delayed payment of interest/EMI by the developer/builder during the agreed period on behalf of the borrower, non-completion of the project on time, etc.
- In view of the higher risks associated with such lump-sum disbursal of sanctioned housing loans and customer suitability issues, banks are advised that disbursal of housing loans sanctioned to individuals should be closely linked to the stages of construction of the housing project/houses and upfront disbursal should not be made in cases of incomplete/under-construction/green field housing projects.
- It is emphasized that banks while introducing any kind of product should take into account the customer suitability and appropriateness issues and also ensure that the borrowers/customers are made fully aware of the risks and liabilities under such products.
But, These schemes were re-launched with a slight tweaking of payment being linked to Construction Linked Plan but basic nature was retained.
Advantages of Subvention Payment Plan: It is indeed a lucrative offer for homebuyers and has several advantages which are given below.
- The builder will pay interest till the offer of possession.
- The homebuyer gets relief from paying EMI and rent together.
- Buyer can book a home with the very small amount and get a good amount of time to pay the balance.
- Buyer will lose a very small amount of money if builder not able to complete the project.
- Builders are forced to deliver the project on time, otherwise, they will have to pay penalty.
Disadvantages of Subvention Payment Plan:
- EMI Default by Builder impact CIBIL Score of a Buyer – if the builder fails to pay interest on time than buyer CIBIL score will get affected
- High Cost under Subvention Scheme – same property is sold at the different rate with the help of different payment plans. Under the subvention scheme cost of flat is higher than other payment plans.
- Agreement of the scheme: A tri-party agreement is signed between the builder, buyer and the Home Loan Provider for such schemes. Builder only shares Application form along with the brief T&C document. Most of the commitments from builders end are oral in nature. A lot of finer details about the scheme are not included in the application form. It gives the impression to the buyer that he is getting one of the best deal in this world. The builder is reluctant to share agreement copy before initial 10% or 15% Booking Amount is paid. It is absolutely necessary to understand the terms and conditions in agreement before opting for Subvention Scheme.
- Lock in Period: A lock-in period is applicable in most of subvention payment plans, in this period buyer can’t sell their property.
- EMI Holiday: An EMI holiday period is applicable to all type of subvention schemes and most of the home buyers don’t know about it. Almost every builder sell subvention plan with tagline NO EMI TILL POSSESSION but it should be like NO EMI / EMI HOLIDAY TILL POSSESSION. The problem starts when the project gets delayed.
- Taxation Issues: Under Subvention Scheme there are a lot of taxation issues like whether TDS u/s 194IA is applicable or not. Reason being, Buyer is not paying the installment to the bank but the builder is paying. Secondly, whether any payment from builder to bank will be considered as income for the buyer or not. Lastly, whether the buyer can claim tax deduction u/s 24(B) on Pre-EMI interest paid by the builder. Kindly clarify all such taxation issues.
- Delay in Project: All real estate project (Except few) get delayed this is a universal truth; if the project is delivered on time then subvention scheme is best for homebuyers. If there is a delay in the project, the cost of property will increase exponentially for the buyer. All the benefits of Subvention Scheme will wipe off in few months. Secondly, in case of delay and after EMI holiday period buyer may find it difficult to pay Pre-EMI.
Conclusion: subvention plan is launched by only those builders which are desperate to sell their inventories. Every builder launched these schemes to increase sales revenue.
With the help of these schemes, the builder wants to create confusion between construction linked plan, possession linked plan, and subvention scheme. With these multiple payment plans, price developer confuses the buyer and sell their inventories.
It is just a marketing strategy to convince buyer nothing else, so be careful while selecting any payment plan.
All schemes are approx. same, in subvention plan buyer, pays a higher amount than construction linked plan.
Case Study of Subvention Plan by a Home Buyer which he posted here
Builders are offering 0% interest subvention schemes for a specific period to lure the buyers. The case below will expose the mal-intention of the builders including the well reputed names.
I bought an apartment from a reputed builder in 2010 in the so called “subvention scheme” that had zero EMI for 24 months. As per the agreement the possession was to be provided within 36 months from the date of agreement.
As part of the subvention scheme, a loan of 80% of the cost from a bank was approved in my name, with an understanding that pre-EMIs will start after 2 years.
Now comes the interesting situation. Two years have already passed, the construction is yet to start. It may take 3, 4, …. or God knows how many years to complete the project. My pre-EMIs will start and I have to pay full interest on the 80% of the cost of the appartment until I get the possession.
The penalty for the delay by the builder is insiginificant….. Rs 5. per sqft and most likely will be adjusted against “increased superarea”.
It is a clear-cut nexus between the builders and the banks. Banks earn interest from both builder and buyer on 80% of the cost of the flat for much longer periods instead of intended period of 1 year.