How to Save more with the Pradhan Mantri Awas Yojana

Posted by Arwind Sharma
April 24, 2017

Self-Published

PMAY

Pradhan Mantri Awas Yojana is a credit subsidy programme that has been initiated by Prime Minister Narendra Modi. It’s been planned for the Economically Weaker Section and Low Income Group. Under this scheme, the beneficiary can get a subsidy on the interest on construction or purchase of a housing property. The scheme is also planned to improve the livability of existing dwelling units.

A recent trend shows that this project is picking up interest since developers are coming with affordable housing segments targeted at Low Income Group people. That’s because they’re eligible for Pradhan Mantri Awas Yojana. The current situation in real estate has some concerns that need to be looked at. Both customers and investors want to play safe at the moment.

Delayed home possession, oversupply and other problems aren’t exactly new to the market at the time. But this can change with the help of PMAY. But that’s only if the developer lives up to their promise of timely deliveries and quality construction. The government is also showing concern regarding the infrastructure of an affordable housing. The scheme is open to anyone who earns Rs. 3 lakh (EWS) and Rs. 6 lakhs (LIG) category in a year. There’s news that people in the Rs.12 lakhs and Rs.18 lakhs loan bracket will also be included in the subsidy programme soon.

Here’s what you need to know about the PMAY.

The Percentage of Government Subsidy

The credit linked subsidy of 6.5% is available only for loan amounts up to Rs. 6 lakh. However, the Rs. 12 lakh slab and Rs. 18 lakh slab will get a government subsidy of 4% and 3% respectively. Any loan taken beyond this threshold is payable at a non-subsidised rate. The scheme can be applied for all slabs with a tenure of up to 20 years.

The Amount of Government Subsidy:

The amount of Government subsidy amount won’t be counted as a differential interest amount. Instead, it will count as the net present value (NPV) of the interest subsidy amount, and it’ll be calculated at a discount rate of 9%. If someone wants to calculate the NPV of the subsidy, they need to know the loan amortisation schedule. That’s because the interest portion of each equated monthly instalment (EMI) should be considered. After that, anyone can use the Fx function in an Excel sheet to find the NPV. This can help determine your Home Loan EMI. The subsidy amount will decrease the interest burden.

Suppose you fit in the Rs. 12 lakhs income group. Therefore, you’re eligible for Rs.9 lakhs loan with a maximum subsidy amount of 4%. You’re aware that the general amount of interest in loans is around 9%. With an EMI of Rs. 8098 per month, your total interest cost will be 10.43 lakhs over 20 years. With PMAY scheme, at 4% subsidy, the NPV of the interest subsidy amount will come to Rs.2,35,000.  Therefore, the loan amount becomes Rs.6.65 lakh. With an interest of 9%, the EMI is further reduced to Rs. 5,983. This makes the total payable amount to Rs.7.70 lakh. With some calculation, you’ll find that the net reduction in EMI will be Rs.2,114 and net savings in interest will be Rs.2,72,445.

Actual interest rates slightly vary from the above calculation. The current marginal cost of funds based lending rate linked Home Loan is around 8.5%. It indicates that the EMI can even be lower. This means that more savings on interest are guaranteed. But you’ll need to check your Home Loan eligibility criteria of PMAY before applying.

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