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Minor RBI Policy Changes and their High
Impact Value on End-users
Having enough money to buy a home has been one
target we all work towards throughout our career and
life. Sadly, the sky rocketing property prices and lack
of favourable price corrections in the near future, has
kept end-users away from the market for quite some
time.
If you are an aspiring home buyer, then there is a
double whammy with a 2010 RBI directive coming in
to recent prominence and focus, as it is bound to
enhance your cash exposure when it comes to a home
purchase on the back of a home loan.
As per the directive by the RBI to banks, stamp duty,
registration charges and taxes such as VAT and Service
Tax are to be strictly excluded from property valuation
while calculating the sanction home loan amount.
Banks are technically allowed to approve maximum
80% of the property value only as the sanctioned
home loan for a property. But to enhance their Home
loans book size, banks have been including these and
many other incidental charges to arrive at a larger and
inflated property cost. This then helps the home loan
applicant to practically take an exposure of more than
80% LTV (Loan to Value) for their properties.
But with the sustained slowing down of the real estate
market across major metros, the banks have now
started to feel pressure on their books due to their
exposures to such properties. In order to keep a check
on the slowly rising bad loans scenario, RBI has
directed banks to strictly adhere to the set norms of
using only the property’s actual value sans frills.
For a clear understanding let us first define and access
the impact of above mentioned taxes:

What are Stamp Duty and Registration
Charges?
Stamp Duty is a tax levied on documents when you
register a property. If a document is stamped and
registered, it is considered legalized and holds
evidentiary value in Court.

But unlike most of the taxes we pay these charges go
to the revenue department of the state were the
property is located.
Most of the state governments in recent times have
increased the guideline values/ circle rates for cities.
This would decrease the gap between the actual
market value of the property and the one in
government books. As an outcome a home buyer will
have to pay higher taxes while registering his
property.

On what properties is service tax
applicable? What is the rate of service tax?
A builder or developer is liable to pay service tax on all
the payments made by the buyer before the
completion certificate is attained. So whenever buying
a pre-launch or under construction property the
developer will pass on the service tax liability onto the
buyer. Hence you will be liable to pay service tax at
the rate of 10.30% of 25% of the sale value i.e. 2.575%
of sale value.

What is the rationale behind the RBI
notification?
To keep a check on excessive lending in December
2010, the RBI indicated to commercial banks that the
amount approved for home loans should not exceed
80% of the property value. In case of properties worth
less than INR 20 Lacs the limit could exceed to 90% of
the value.
On Feb 3rd this year, this notification came about as it
was seen that in order to artificially inflate the
property value so as to give bigger loans, stamp duty,
registration and other charges were included as
property value, which technically they are not. Adding
these charges overstated property values, enabling
banks to give bigger loans. Hence, this notification
came about.

How does the RBI notification impact you?
Post exclusion of extra charges from the loan
application a buyer has to pay all the applicable taxes

For more on our research | Samidha Bansal | Deputy Manager - Research and Analysis | +91 (044) 3098 0519 | samidha.bansal@indiaproperty.com

and other charges from his pocket. Meaning in
addition to the 20% amount a buyer has to save an
extra 5-10% of the total property value levied on
account of government fees and extra charges.
Another necessary aspect to bring to notice here is
that a buyer’s loan eligibility also varies depending on
his surplus monthly income based on his age, monthly
income, expenses and other liabilities. So it’s not
necessary that the bank would approve the whole
80% for each loan application.
Some basic calculations
Suppose Mr. Shah wants to buy a house.
He has identified an under-construction property
worth INR 50 Lacs
Property Value
Stamp Duty @ 5%
Registration Charge
@ 1%
VAT @ 1%
Service Tax @
2.57%

INR 50 Lacs
INR 2.50 Lacs
INR 0.5 Lacs
INR 0.5 Lacs
INR 1.28 Lacs

The total value to be paid will be INR 54,78,750.
Before the RBI notification, a bank would give Mr.
Shah up to 80% of INR 54,78,750 as a home loan, and
Mr. Shah would put up 20% of the value i.e. INR
10,85,750 on his own.

Post RBI notification, the loan will be only up to 80%
of the property value, excluding stamp duty,
registration charges, VAT, service tax and other
charges. So the bank will offer INR 40 Lacs as a loan.
The balance INR 14,78,750 will have to be paid by Mr.
Shah.
All in all Mr. Shah will have to put close to 36% more
from his savings.
Conclusion
One of the biggest consequences of a bank lending on
appreciated property values is that it creates an
unavoidable bubble of notional high property values.
In other words there is a gap between the estimated
property value taken in the loan documents and the
actual market value of the property. Under such a
situation, a buyer may buy a property which in reality
he can’t afford.
It also strains the health of the banking sector as many
of the large banks have a sizeable exposure to the real
estate sector through the Home Loan product.
Even though a general buyer would see this as an
immediate and visible burden, the flip side to this
would be that it actually helps a buyer lower his risk
exposure. So even though a buyer has to make a
bigger initial contribution, in the long run he stands to
benefit.

About IndiaProperty.com
India Property Online Pvt. Ltd. is country’s leading portal in the online real estate space. Launched in 2006, IndiaProperty.com offers one-stop property marketing
solutions serving builders, real estate agents and home owners to sell or rent their properties, while offering a feature rich interface for property buyers to search
and identify properties that match their requirement. The portal receives over 1.2 million unique visitors a month, has 4.5 lakh properties listed across 20 cities, 3
million active registered users and over 1000 new projects advertised.
For more on our research | Samidha Bansal | Deputy Manager - Research and Analysis | +91 (044) 3098 0519 | samidha.bansal@indiaproperty.com


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