One of my friends had shortlisted his dream Home but was confused which payment plan to follow.
There are usually three payment Plans.
- Upfront payment: You pay the builder around 95% of cost upfront with some discount & rest at the time of possession.
- Construction Linked Installment Plan: You pay certain % of cost as the construction progresses.
- Time Linked Installment Plan: You pay the builder at predetermined regular intervals irrespective of the project progress.
As for my friend, the builder was offering 12% discount on the Basic Sales Price if he made all the payment upfront. It sounded too tempting to even think about the second plan of Interest Free Construction Linked Installment Plan.
But then should my friend go for upfront payment? And if he does how much would he gain?
In this post I would try to answer these questions.
Reasons & risks which are well known for avoiding upfront payment:
- Given the maze of regulations and the number of permissions required at every stage, even the most well-intentioned builder cannot promise a firm delivery date. And this shows in all the project delays that happen.
- If at any stage the project is scrapped or it doesn’t progress you tend to loose a lot if you have made an upfront payment
- There is always pressure on builder to complete the project at the earliest so that he can demand the next installment. So eventually the project progresses faster if most of people invested have opted for Construction Linked Installment Plan
- And then there could be several such reasons you can think of.
Financial Calculations:
But other than these let’s see if the discount makes sense by doing some simple maths.
I have taken example of Omaxe New Heights, Faridabad project which is open for booking and the (un)official date of possession is 3 years.
*******This Analysis was done 3 years back and hence the price is low but the analysis still holds true!********
About the project:
- Project Name: Omaxe New Heights, Faridabad
- Accommodation: 3 B/R, Living, Dining, Kitchen & toilets + Study
- Area: 1350 sqft
- Basic Sales Price (BSP) after initial discount: Rs. 2523500
- Car Parking: Rs. 150000
- EDC/IDC: Rs 168/sqft = 226800
- Time to Possession: 36 months
Payment Schemes :
| PLAN A | Down Payment Plan (12% Rebate on BSP) |
| At the time of Booking / Allotment | Rs. 2.5 lac. |
| Within 45 days of Booking | 20% including booking Amount |
| With in 60 Days of Booking / Allotment | 75% of BSP + 50% Additional Charges |
| On Offer of Possession | 5% of BSP + 50% Additional Charges+ Other Charges (if any) |
| PLAN B | Interest Free Construction Linked Installment Plan |
| At the time of Booking / Allotment | Rs. 2.5 lac. |
| Within 45 Days of Booking / Allotment | 20% including booking amt |
| On start of excavation | 10% BSP |
| On Casting of Stilt Roof | 10% BSP + 50% EDC & IDC |
| On Casting of First Floor Roof | 10% BSP |
| On Casting of Third Floor Roof | 10% BSP |
| On Casting of Sixth Floor Roof | 7.5% of BSP+50% Additional Charges + 100% PLC (if any) |
| On Casting of Ninth Floor Roof | 7.5% of BSP |
| On Completion of RCC Structure | 5% of BSP |
| On Completion of Internal Plaster | 5% of BSP |
| On Completion of External Plaster | 5% of BSP |
| On Completion of Flooring | 5% of BSP + 50% EDC & IDC |
| On offer of Possession | 5% of BSP + 50% Additional Charges+ Other Charges (if any) |
Assumptions:
We assume that the Opportunity cost (The returns you would generate by investing some where else like Mutual Funds, Fixed Deposit or your Business) for the down payment is 10% per annum – which is equal to the average Home Loan Rates.
For Construction Linked Plan each installment is due at equal intervals of 3.25 months
Calculations:
| PLAN A | Down Payment Plan (12% Rebate on BSP) | # of Months | Payments Made | Present Value of Payment |
| At the time of Booking /Allotment | Rs. 2.5 lac. | 0 | 2,50,000 | 2,50,000 |
| Within 45 days of Booking | 20% including booking Amount | 1.5 | 1,94,136 | 1,91,734 |
| With in 60 Days of Booking / Allotment | 75% of BSP + 50% Additional Charges | 2 | 18,53,910 | 18,23,393 |
| On Offer of Possession | 5% of BSP + 50% Additional Charges+ Other Charges (if any) | 35.5 | 2,99,434 | 2,23,026 |
| Present Value of All the Payments Made | 2,488,153 | |||
| PLAN B | Interest Free Construction Linked Installment Plan. | # of Months | Payments Made | Present Value of Payment |
| At the time of Booking /Allotment | Rs. 2.5 lac. | 0 | 2,50,000 | 2,50,000 |
| Within 45 Days of Booking / Allotment | 20% including booking amount | 1.5 | 2,54,700 | 2,51,549 |
| On start of excavation | 10% BSP | 3 | 2,52,350 | 2,46,145 |
| On Casting of Stilt Roof | 10% BSP + 50% EDC & IDC | 6.25 | 3,65,750 | 3,47,263 |
| On Casting of First Floor Roof | 10% BSP | 9.5 | 2,52,350 | 2,33,219 |
| On Casting of Third Floor Roof | 10% BSP | 12.75 | 2,52,350 | 2,27,013 |
| On Casting of Sixth Floor Roof | 7.5% of BSP+50% Additional Charges + 100% PLC (if any) | 16 | 2,64,263 | 2,31,403 |
| On Casting of Ninth Floor Roof | 7.5% of BSP | 19.25 | 1,89,263 | 1,61,319 |
| On Completion of RCC Structure | 5% of BSP | 22.5 | 1,26,175 | 1,04,684 |
| On Completion of Internal Plaster | 5% of BSP | 25.75 | 1,26,175 | 1,01,898 |
| On Completion of External Plaster | 5% of BSP | 29 | 1,26,175 | 99,187 |
| On Completion of Flooring | 5% of BSP + 50% EDC & IDC | 32.25 | 2,39,575 | 1,83,319 |
| On offer of Possession | 5% of BSP + 50% Additional Charges+ Other Charges (if any) | 35.5 | 2,01,175 | 1,49,840 |
| Present Value of All the Payments Made | 2,586,840 | |||
Total Cost:
- Plan A: Rs. 2,488,153
- Plan B: Rs. 2,586,840
Actual Gain if you take plan A: Rs. 98,686 – or 3.97%
Some More Scenarios:
Question 1: What if the project gets delayed? Below is table showing the loss/gain you would make if you choose Plan A over B.
| Years to Possession | Plan B Cost | Plan A Cost | Plan B – Plan A | % gain |
| 2 | 26,78,215 | 25,12,532 | 1,65,684 | 6.59% |
| 3 | 25,86,840 | 24,88,153 | 98,686 | 3.97% |
| 4 | 24,84,910 | 24,67,013 | 17,897 | 0.73% |
| 5 | 24,05,382 | 24,47,120 | -41,738 | -1.71% |
| 6 | 23,30,237 | 24,31,243 | -1,01,006 | -4.15% |
If Omaxe gives you early possession in 2 years you would be gaining 6.5% while if it delays the project by 1 year & you get the possession in 4 years, you would gain 0.75%. If there is further delay you would be actually making losses.
Question 2: What if my opportunity cost is not 10% but 8% or 12% per annum?
I have assumed that you get possession in 3 years as promised. Below table shows how much you gain depending on your opportunity cost.
| Opportunity cost | Plan B Cost | Plan A Cost | Plan B – Plan A | % gain |
| 8% | 26,44,645 | 25,08,162 | 1,36,483 | 5.44% |
| 9% | 26,15,459 | 24,98,052 | 1,17,407 | 4.70% |
| 10% | 25,86,840 | 24,88,153 | 98,686 | 3.97% |
| 11% | 25,58,775 | 24,78,460 | 80,315 | 3.24% |
| 12% | 25,31,251 | 24,68,966 | 62,285 | 2.52% |
So we see that as opportunity cost (or home loan interest rate) goes up you make lower gains. Above 15% you would be making losses by choosing Plan A.
Question 3: What if my builder is offering me 8% or 15% discount for upfront Payment?
The table below shows Actual Gains you make on the stated rate of discount by the builder, assuming that the project is completed in 3 years & your opportunity cost is 10%.
| Discount Rate | Plan B Cost | Plan A Cost | Plan B – Plan A | % gain |
| 8% | 25,86,840 | 25,86,310 | 530 | 0.02% |
| 10% | 25,86,840 | 25,37,232 | 49,608 | 1.96% |
| 12% | 25,86,840 | 24,88,153 | 98,686 | 3.97% |
| 15% | 25,86,840 | 24,14,536 | 1,72,304 | 7.14% |
| 20% | 25,86,840 | 22,91,841 | 2,94,999 | 12.87% |
At higher discount rate say 15%+, it totally depends on your risk profile – are you willing to take the risk for the gains you would make!
To conclude
What appears to be 12% discount by taking Down Payment Plan actually turns out to be 4% in real terms. Moreover Down Payment Plan is very high risk plan. Also if the Possession is delayed by even 1 year you make no gain and after 1 year delay you actually are sitting on a loss.
So it always makes sense to choose Construction Linked Installment Plan.
Hi Amit, i am interested in opening a recurring deposit a/c in sbi with 10000 per month for 27 months.. My matured amount will be 3 lakhs. Now, while withdrawing 3 lakhs from bank. Do we need to pay any tax to government or to bank. or after withdrawing do i need to pay tax to government? please clarify amit.. sincerely waiting for ur reply
Hi Sairam
The bank would not deduct any tax from your maturity amount of Rs 3 Lakhs but you would yourself have to add the interest income to your income and pay tax according to your tax slab. So for recurring deposit there is no TDS but you still need to pay your taxes!
Amit
The comparison is very clearly and well explained. Agree with you that the instalment plan is preferable over the upfront payment plan, even though the latter is discounted.Especially, if one plans to take a loan for the major part of the funding.In the upfront option, the entire loan is disbursed in one go, and the interest starts ticking from day one.. Most construction projects never meet their timelines and a large number of them get stuck midway.. At least when one takes a loan on instalment basis, he or she pays interest only on the amount of loan availed.
Very eye opening analysis
Thanks!