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Make the right choice

Make the right choice   | Photo Credit: Bhagya Prakash K

The time has arrived for lower income group and middle class citizens to decide on buying their dream home. By R.P. Deshpande

The common man had a huge expectation from the Union Budget 2017: that there will be drastic reduction in income tax rates and increase in the limit of deduction allowed for interest payment on home loans and increase in limits in Section 80C of IT Act and much more. This in view of Assembly elections in 5 States and after the hardships due to demonetisation. and But when the Budget was announced on February 1, there were no such populist measures.

Budget 2017 provided the much needed thrust to real estate by way of according infrastructure status to affordable housing, and increasing tax breaks for builders undertaking affordable housing projects. The inclusion of middle income group households (up to income of Rs. 1.5 lakh per month) for interest subsidy under CLSS (Credit Linked Subsidy Scheme) is a welcome decision. Reduction of individual income tax rates from 10% to 5% for income slab of Rs. 2.5 lakh to Rs. 5 lakh and indications of interest rates on home loans continuing their southward journey made many to assess whether finally the time has come to decide on their dream home.

Let us analyse whether it is the right time to buy your dream home.

As property prices have come down considerably, it could be the first and foremost factor that may influence your decision.

The second most influencing factor is the easy access to home loans, and the eligibility to get 80-85% of cost of property as loan. The interest on home loan and the transparency in charging interest over the repayment period are crucial.

Ups and downs

Interest rates on home loans in past 25 years have witnessed ups and downs ranging from as high as 17.5% to a low of 7.5% in 2004, and presently hovering at around 8.5% pa.

One can expect monetary transmission (decrease/increase of interest rate during repayment period, as and when RBI tweaks Repo rate, the rate at which RBI lends money to commercial banks) and transparency in charging interest rate under the regime of MCLR (Marginal Cost of funds based Lending Rate) method of fixing interest on home loans, which has come to effect from April 2016.

The next factor is the provisions made in Budget 2017. Let us see how the Budget is catalysing your decision to buy a home.

Although expected higher limits of tax deductions on interest payment and repayment of home loans were not accorded, reduction in tax rate on income from Rs. 2.5 lakh to Rs. 5 lakh from 10% to 5% is indirectly helping the home loan aspirants. Most assessees stand to save taxes amounting to more than Rs. 12,875 pa, which naturally increases their disposable income and in turn, the repayment capacity to be eligible for slightly higher home loan.

Another crucial factor is the recently announced revision in CLSS (Credit Linked Subsidy Scheme) under PMAY (Pradhan Mantri Awas Yojna), for first-time home buyers. Apart from much needed encouragement to lower strata of society (EWS – Economically Weaker Section and LIG – Lower Income Group), the CLSS has now included MIG (Middle Income Group) earning up to Rs. 1.5 lakh per month. Under the revised scheme, subsidy of 4% and 3% is paid for home loans up to Rs. 9 lakh and Rs. 12 lakh.

The beneficiary can get higher amount of loan, but subsidy will be limited to eligible loan amount. The existing benefits such as deduction up to Rs. 150,000 towards principal loan amount repayment under Sec 80C and deduction up to Rs. 200,000 towards interest paid under Sec 24 of IT Act will continue to be available to home loan borrowers.

The Net Present Value (NPV) of the interest subsidy for the entire repayment period (up to 20 years) will be calculated at a discount rate of 9% and credited upfront to the loan account of beneficiaries, thus reducing the loan amount resulting in lower EMIs (Equated Monthly Instalments), as detailed in the table.

Thus tax savings of more than Rs. 1,000 per month and subsidy of about Rs. 2,000 per month will increase the disposable income, which should encourage many middle class families to decide on buying their dream home. With increase in net income by more than Rs. 3,000 per month, the eligibility of home loan also increases considerably.


After demonetisation, there is enormous liquidity in the system and as such banks and other lending institutions are eager to deploy the surplus and for them, there cannot be a better option than advancing long-term home loans.

Hence interest rates on home loans are expected to reduce further. All borrowers who have opted for floating rate home loans will stand to gain much under MCLR regime.

As there is huge pile of housing stock with leading builders and developers across all major urban places, purchasers are in a commanding position for hard bargain and securing the best deal. As ready-to-occupy units are available at realistic prices, the purchaser is at an advantage, as he can mitigate normal risks which come along with projects under construction.

The situation of unsold inventory may not exist for too long, due to the fact that there has been drastic decline in new projects undertaken by builders and developers in the past 3 years. This factor is going to reduce the supply-demand gap in the near future, which may see increase in property prices.

In light of above factors, it may be opined that the time has come for lower income group and middle class citizens to decide on buying their dream home.

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Printable version | Jul 2, 2020 10:40:29 AM |

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