To encourage building budget hotels, the tourism ministry will grant capital subsidy to new one-, two-, three-star and heritage hotels.

India has a shortage of 150,000  rooms and the government hopes this will create additional 7,000 hotel rooms for events like the Commonwealth Games, scheduled in New Delhi in 2010.

"To make the scheme investor friendly, the subsidy will be paid directly and not through banks or financial institutions. This will also reduce paper work," said MN Javed, deputy director general, tourism ministry.

For the past two decades, the central government has been paying an interest subsidy of 3 per cent of the interest paid on loans. The subsidy for identified tourist circuits and destinations is 5 per cent. The companies that have already availed of the interest subsidy will continue to get it till 2012.

The new scheme, however, does not have an interest subsidy component.

Under the capital subsidy scheme, the incentive for a new one-star hotel is Rs 200,000 per room, subject to a cap of Rs 30 lakh (Rs 3 million). For a two-star facility, the hotelier will get Rs 300,000 per room, subject to a cap of Rs 75 lakh (Rs 7.5 million), while for a three-star hotel, the amount is Rs 300,000 per room, subject to a cap of Rs 100 lakhs (Rs 10 million). The scheme will also apply to heritage hotels built before 1950.

The capital subsidy scheme was floated in the 10th Five-Year Plan (2002-2007) when the incentive was 10 per cent of the loan taken, subject to a cap of Rs 25 lakh (Rs 2.5 million), 50 lakh (Rs 5 million) and 75 lakh (Rs 7.5 million), for one-, two-, and three-star hotels, respectively.

The scheme, however, did not apply to hotels in metros. The revised scheme, valid from April this year, would be announced in a few days, said a tourism department official. It will be valid for the next five years.