Sep 15, 2009. Government of India has announced a 1% interest rate subvention or subsidy for housing loans upto Rs. 10 lakhs. This was announced in a press release by the Press Information Bureau.

According to the press release, interest subsidy of 1 percent will be made available on individual housing loans upto Rs.10 lakhs for construction / purchase of a new house or extension of an existing house provided the cost of the construction/price of the new house/extension does not exceed Rs. 20 lakhs.

The Scheme will be implemented through Scheduled Commercial Banks (SCBs) and Housing Finance Companies (HFCs) registered with the National Housing Bank (NHB). This means that most institutions that offer housing loans in India would be part of this scheme.

The first twelve monthly instalments of all such loans sanctioned and disbursed during the period of twelve months from the date of publication of the scheme will be eligible for interest subvention.

Subsidy of one percent will be computed for 12 months on disbursed amount and adjusted upfront in the principal outstanding irrespective of whether the loan is on fixed or floating rate basis.

This cut in interest rate for home loans should help borrowers significantly in the first year of the loan by cutting their Equated Monthly Installments or EMIs. For example, on a housing loan of Rs.10 lakhs, the 1% interest relief available wil amount to Rs. 10,000 per account over a period of 12 months or 12 EMIs.

The key point to note is that the 1% reduction in your home loan interest rate will apply only for the first 12 EMIs and subsequently you will be paying the EMIs based on the interest rate of your bank.

 This new subsidy of 1% on home loans is expected to boost demand for housing loans and stimulate activity in the construction sector and other allied sectors.

The Government has announced an amount of Rs. 1000 crores for the scheme. The number of beneficiaries under this scheme will be based on the housing loan amount of the applicants until the amount of Rs. 1000 crores has become exhausted.

If you are planning a house purchase and you fall under the criteria for this scheme (the loan amount must be atmost Rs. 10 lakhs and the cost of construction / purchase of the house must not exceed Rs. 20 lakhs), you should approach your bank for further details on how to avail this subsidy. To get the benefits under this scheme, you must act quickly since the scheme will run only till the amount of Rs. 1000 crores that has been allocated by the Government gets exhausted. 

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