Announcing this in his Budget for 2011-12, Mukherjee also increased the value of houses eligible for availing the interest subsidy by Rs 5 lakh to Rs 25 lakh per unit.
"To further stimulate growth in housing sector, I am liberalising the existing scheme of interest subvention of one per cent on housing loans by extending it to housing loan up to Rs 15 lakh, where the cost of the house does not exceed Rs 25 lakh from the present limit of Rs 10 lakh and Rs 20 lakh respectively," he said while presenting the Budget.
The government also enhanced the existing housing loan limit to Rs 25 lakh from Rs 20 lakh under priority sector lending on account of increase in prices of residential properties in urban areas, he added.
On the development of homes for poors, Mukherjee said: "Credit enablement of economically weaker sections (EWS) and LIG (low income group) households is a serious challenge. To address this issue, I propose to create a Mortgage Risk Guarantee Fund under Rajiv Awas Yojana.
"This would guarantee housing loans taken by EWS and LIG households and enhance their credit worthiness".
Mukherjee also announced enhancing the provision under Rural Housing Fund to Rs 3,000 crore from the existing Rs 2,000 crore to provide housing finance in rural areas at competitive rates.
Welcoming the moves, analysts and real estate developers said these proposals are likely to encourage builders to give more emphasis to projects costing up to Rs 25 lakh.
The country`s largest realty consultant Jones Lang LaSalle India Chairman and Country Head Anuj Puri said firms such as Unitech and Ansals, which are rolling out budget housing, will be benefited by increase of volumes.
"The one per cent interest subvention for home loans up to Rs 15 lakh from the previous limit of Rs 10 lakh will come as a relief to home loan borrowers from the LIG segment," he said, adding raising the priority home loan limit is also a good news for the LIG segment.
Puri, however, said it is unlikely to help and "ease the pain in the metropolitan cities where real estate prices and therefore demand for affordable housing is highest".
Another consultant Cushman & Wakefield said the proposal will help developing affordable houses in smaller cities.
"The announcement...will enable to create a demand for housing in smaller cities, where housing is available for a ticket size of less than Rs 25 lakhs. This is expected to increase the development momentum in such locations," Cushman & Wakefield India Managing Director Anurag Mathur said.
Parsvnath Developers Chairman Pradeep Jain said the government`s proposals will obviously increase the demand for affordable homes across the country.
In a statement, Raheja Developers spokesperson said: "The budget is more focused on rural and social development of the country. Emphasis has been given to infrastructure and rural development. Overall budget is good for the general public.
But it fails to meet the expectations of real estate and SEZ."
Chintels India Joint Managing Director Prashant Solomon said the increase in the tax exemption limit for individuals, along with the expansion of the interest subvention scheme, is also likely to provide the needed demand boost to the housing sector.
Industry players, however, expressed unhappiness over the government`s decision of not re-introducing the tax exemption scheme to develop affordable houses under the section 80IB(10) of Income Tax Act.
"The budget remained silent on the pressing issue of extension of the STPI (Software Technology Parks of India) exemptions as well as Sec 80IA and 80IB, which are pertinent to the construction of residential projects of units of sizes below 1m200 sq ft. This is a de-motivating factor, which will further curtail the supply of affordable housing," Puri said.
In the 2010-11 Budget, the government had announced a one-time interim relief to the housing and real estate sector by allowing builders to complete affordable housing projects in five years instead of four years to claim deductions on profit under section 80IB(10) of Income Tax Act.
However, this extension is available for housing projects approved on or after April 1, 2005. Under the existing provision of section 80IB(10), 100 per cent deduction is allowed to developers to build affordable housing projects provided the project is sanctioned before March 31, 2008.
"The real estate companies were expecting that the government would also provide 80IB(10) extension by one more year and 80C for principal repayment by Rs one lakh per annum.
But such reforms were not seen in the Budget this year," Falcon Realty Services Chief Executive Officer Bhim Yadav said.