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Posted Date: Jun 05 2021   |   Posted By : DCNPL

A complete guide on subvention scheme

Since purchasing a property demands huge investment, the real estate residential market has been coming with new financing options for the potential buyers. One of such is the Subvention Scheme.

Nowadays numerous real estate developers are assisting buyers to fulfill their dream of owning a home by opting for a subvention scheme. However, despite being a buzzword, many people are still unaware of what this is and how it works.

For a starter, Many times we came across hoardings stating " Book now pay later", " No EMIs for 18 months". By seeing these advertisements have you wondered "why real estate developers are being lenient regarding the payment with potential buyers?" The reason behind such leniency is the subvention scheme.

The subvention scheme is the extended form of regular home loans. Unlike a regular home loan where the transaction takes place only between two parties’ viz. buyer and lender, in the subvention scheme, three parties are involved viz. buyer, lender and real estate developer.

Now some of you might wonder “what does the real estate developer have to do with the home loans?"


So to answer this question, it's the real estate developer only who pays interest on behalf of the buyer, based on agreement.

To have a clear idea let's plunge deep.

What does the subvention scheme imply?

Under this scheme three parties viz. buyer, lender and real estate developer enter into a tripartite agreement, where the real estate developer agrees to pay the interest of the loan till the time buyer seizes the possession of the property or for a particular period as mentioned in the agreement. The buyer has to pay inky 5%-20% of the money upfront while the remaining is disbursed by the bank in the form of a loan to the developer to continue the construction work.

Even though the interest is paid by the developer, still it's always been a question of whether a buyer should go for it or not. For helping you to make the decision, here are the main points related to the subvention scheme that potential house buyers must know.

EMI default by the developer affects a buyer's  CIBIL score - If by any means, a developer couldn't pay the EMI then it's your CIBIL score that will affect it. Because in the bank's record it is the customer who is the borrower, not the developer. That's why it is considered a big risk because you are the one who has to suffer because of the low credit score, not the developer.

Some plans have high cost under subvention schemes - There are different plans that the developer offers the potential buyers such as possession linked plan, construction linked plan etc. Therefore, before jumping to the conclusion, have complete knowledge about such plans under the scheme and regular home loans, then determine your debt to income ratio for selecting the best option.

Delay in construction - In case the developer agrees to pay the interest for a subvention period (limited period as mentioned in agreement) rather than paying till the construction is finished there is a risk. Because unfortunately if the construction gets delayed and continues after the subvention scheme, it's the buyer who will have to start paying the EMIs, meaning a buyer will end up paying both EMIs and the rent that will put a lot of financial burdens.

Limited risk for buyers - The risk is limited to the loan amount as per the construction stage, not on the entire loan amount even if the developer fails to provide the possession to the buyer. This is beneficial for the buyer as he/she does not have to deal with the entire burden of the loan.

The issue regarding taxation claim - There is a lot of taxation issue under subvention scheme as it is the builder who pays the interest, not buyers. Under section 80C, a buyer can avail of the tax benefit only if he/she gets the possession. Furthermore, a buyer cannot claim a deduction for the principal repayment amount during the construction phase. Still, it would be advisable and the best of interest of the buyer to consult with a professional tax consultant to get a clear view.

Final thoughts

Don't entice with the advertisement claiming "No EMI for 18 months" or any kind of that, first acquire complete detailed information regarding the scheme and go through the terms and conditions carefully. Go with the scheme only if you think you will be benefited in the long term. Purchasing a property is not a child's play; take your steps carefully so you won't end up in any dire situation.

Now that you know about the subvention scheme, make your decision wisely.

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