What is a subvention scheme in Real Estate ..?
Real Estate Subvention Plan is a financing scheme where the developer/builder agrees to absorb the home loan interest payable from the date of disbursement of payment made by the homebuyer.
Its main selling point is that the developer pays the interest on the loan for a period, to save immediate cost to buyer.
Here is a breakdown of what it often entails:
🏠 Key Mechanics
Tripartite agreement: All the three parties i.e the borrower, developer and the lender (in this case bank) enters into a legal agreement that outlines their specific roles in contrast to the higher purchase agreement.
How much is upfront payment by the buyer? The buyer pays a fractional amount of the cost of the home as preliminary, say 5-25% of the property cost to lock-in with the seller.
Bank wise Loan Disbursement: Your bank gives the remaining amount in the form of a home loan, and will release this money to your developer according to milestone based disbursements.
Interest Subvention by Developer: In this case, for a certain period (generally possession time or fixed number of months like 24-48), developer pays the interest part (usually referred to as Pre-EMI) on the disbursed loan amount.
Buyer Commencement Of Full EMIs: The homebuyer will now start paying the full Equated Monthly Installments (EMIs – consisting of part-principal and part-interest) once the condition is met, ideally after possession of a fully constructed property.
Critical Considerations for Homebuyers
| Consideration | What to Check & Why |
| The Tripartite Agreement | This is the most crucial document. Ensure it clearly states that the developer pays the interest (Pre-EMIs) UNTIL POSSESSION (not just for a fixed period like 24 or 36 months). |
| Developer’s Track Record | Investigate the developer’s history of completing projects on time. A strong, financially stable developer with a good reputation minimizes the risk of default. |
| Hidden Costs | Property under a subvention scheme is often priced higher than the same property under a standard construction-linked or possession-linked payment plan. Do a cost-benefit analysis of the total cost in each scenario. |
| Credit Score Impact | Even if the developer is paying the interest, the loan is in your name. If the developer is late or defaults, the bank will chase you for the payment, and your credit score (CIBIL in India) will be negatively affected. |
| Tax Benefits | You can generally only claim the tax deduction on the home loan interest (under Section 24 of the Income Tax Act) after you get possession. The interest paid by the developer (Pre-EMIs) can be claimed post-possession in five equal installments. |
Government and Legal fairs (In India)
Subvention programs aren’t entirely illegal, but they do hang around in a fine level of scrutiny thanks to misuse in the past.
RERA (Real Estate Regulatory Authority) Role
The Real Estate (Regulation and Development) Act, 2016 (RERA), brought a much-needed structure and accountability to these schemes:
Compulsory Registration: The promoter shall register the project with RERA prior to marketing or advertising for sale any subvention scheme or payment plan. You as a buyer should verify this registration.
Fund Utilization (Escrow): RERA prescribes that 70% of sale proceeds (including what has been disbursed under a subvention scheme) collected from buyers have to be maintained in a separate account and be used exclusively for land cost and construction of the project concerned. This would help prevent hoarding of funds, a major contributor towards delay in projects.
Transparent Deals: It is important for the developers, to clearly announce the payment schedule, delivery schedules and other terms of subvention plans. False advertising (such as “no-cost EMI”) is prohibited.
Compensation for Delay: RERA imposes penalty on developers for delays while homebuyers under subvention schemes can file a complaint seeking compensation if the possession is not delivered beyond the agreed time period.
Intervention by NHB and RBI
1) Subvention scheme (Zero EMI schemes where developer pays pre-EMIs varying from 12 months to 3 years): Regulators on housing finance are cracking the whip taking stringent action against subvention schemes in their riskiest forms:
NHB Restriction (2019) The National Housing Bank (NHB) released letter/circular to Housing Finance Companies (HFCs), advising them to avoid funding of subvention schemes. This was a major decision after the cases of fraud and default by developer surfaced.
RBI Stance: Reserve Bank of India (RBI) has been telling banks / financial institutions to ensure that disbursal are directly linked to stages of completion and not released upfront merely based on the demand from the builders. The use of loan funds by realtors has also been recognized as a concern by the RBI.
Respite from Supreme Court: There are several cases in which the Supreme Court has come to the rescue of homebuyers, notably ruling that banks should not initiate/continue action for EMI recovery against individual defaulting builders possessing delayed possession.
✅ Benefits for Homebuyers
No Double Burden: It ensures that buyers who may be living in rented homes at present are not paying both rent and the entire home loan EMIs while the construction of their home is under development.
Lesser Initial Financial Burden: Purchasers are free from the obligation of massive interest outflows soon after they book, hence under-construction makes more inroads.
Developer Incentivise: As it’s the developer who is paying the interest, they have an enormous carotid in getting their project finished on time and stopping any liability to themselves.
⚠️ Potential Risks
Effect on Credit Score: The buyer has the loan in his/her name. In case developer defaults or delays on the interest payment (Pre-EMI), it can even dent the credit score of buyer despite he is not paying the amount directly.
Project Delays: In the event of project being delayed much beyond a set subvention period( as specified in the agreement), buyer may be liable to pay full EMI and rent burden together baring him thoroughly financially.
More Expensive Property: In some cases, the developer might include in a higher sales price for the property a markup to cover interest costs.
NHB/Regulatory Restrictions It’s worth mentioning that regulators in some parts of the world (including NHB for India) have, at times, made it tough for developers to misuse these schemes.
If you are planning to buy a property under subvention scheme, it is essential that you read the tripartite agreement carefully and look at the track record of the developer to know whether he has completed projects on time in past.
