OPINION | Tax boost in Budget 2026 could ease India's housing paradox

Affordable housing, the backbone of urban India, is quietly disappearing.

In 2025, India’s real estate market will be remembered for extremes. Luxury apartments are selling fast, premium prices are easily absorbed, and developers’ balance sheets are stronger than ever. However, beneath this success lies a troubling contradiction: affordable housing—the backbone of urban India—is quietly disappearing. This isn’t a demand crisis but a crisis rooted in economics, policy design, and misaligned incentives.

A Vanishing Segment

Recent market data paints a stark picture. Knight Frank India reports that the supply-to-demand ratio for homes priced below ₹50 lakhs has collapsed to 0.36 in the first half of 2025, down from a balanced 1.05 in 2019. In simpler terms, for every 100 affordable homes demanded, only 36 are being supplied.

The shift in developer focus is dramatic. Affordable housing accounted for over half of new residential launches in 2018; today, it represents just 17%. Sales in this segment have dropped nearly 17% year-on-year, even as luxury housing records its fastest-ever absorption rates. The paradox is evident: premium projects are selling quickly, yet unsold high-ticket inventory piles up. Meanwhile, lower- and middle-income households find homeownership increasingly unattainable. The market is oversupplying where demand is limited and undersupplying where it is structurally deep.

Why Developers Are Walking Away

The lack of affordable housing supply isn’t due to a lack of intent by developers. It’s primarily driven by razor-thin margins and unviable economics. Rising construction costs—cement, steel, labour, compliance, and most notably, urban land prices—have outpaced the growth of lower-income household incomes. Affordable housing, by definition, operates on tight margins, whereas luxury housing doesn’t.

For developers, the decision is clear: premium projects offer larger margins and pricing flexibility. In contrast, even small cost increases in affordable housing can wipe out profitability. Geography further complicates matters. Affordable land is usually available on city peripheries, but these areas often lack sufficient transport, social infrastructure, and employment opportunities. Consequently, developers find it difficult to make projects financially viable—either land in the city is too expensive, or peripheral areas are too disconnected.

The Illusion of Affordability

There’s a growing narrative that housing affordability has improved. Mumbai’s EMI-to-income ratio, for example, has dropped below 50%, now sitting at around 47%. This decline is attributed to lower interest rates and stable income growth. But this statistic hides the true barrier to homeownership for lower-middle-income households. The real challenge isn’t just the monthly EMI but the high upfront costs—down payments, stamp duty, registration charges, and rising property prices—making homeownership increasingly out of reach.

Moreover, a significant portion of the affordable housing target audience is self-employed or earns informal income. Traditional banking requirements, such as salary slips, formal credit histories, and tax returns, exclude many genuine buyers from institutional financing. So, while demand exists, access does not.

The Policy Mismatch

At the heart of the issue lies a disconnect between policy intentions and market realities. The government’s commitment to “Housing for All” remains clear, and initiatives such as PMAY 2.0 reflect that vision. However, the frameworks governing taxation and incentives have not evolved to match rising costs.

Take the current GST regime: residential housing is split into two categories—“affordable” projects taxed at 1% and all others taxed at 5%. To qualify as affordable, a home must cost less than ₹45 lakhs and meet strict size limits. These thresholds were set in 2017, and in 2026, they are outdated. Industry bodies, such as CREDAI, have proposed raising the affordability threshold to ₹90 lakhs, which would reflect current land and construction costs. Additionally, the legal definition of “affordable” should reflect the distinct price and cost dynamics between rural and urban areas.

The Hidden Tax Burden

A major issue within the existing framework is that residential real estate developers cannot claim input tax credits, unlike other industries. Although GST on cement and tiles has been reduced, developers can’t offset these taxes against the GST collected from buyers. As a result, the 1% tax rate on affordable housing doesn’t account for input taxes embedded in construction costs, leading to a cascading tax effect. This hidden tax burden inflates prices, undermining the very goal of affordable housing. Allowing input tax credits for affordable projects or reducing GST on works contracts would directly reduce construction costs and make housing more affordable.

The Case for Direct Tax Incentives

To level the playing field, income tax incentives are essential. The reintroduction of Section 80-IBA of the Income Tax Act, which previously offered a 100% tax holiday on profits from affordable housing projects, could boost supply once again. However, the section had limitations, including a project life cap of five years, which is too short for the nature of the industry.

To revitalise affordable housing, Section 80-IBA could be revamped by:

1. Extending the project life to 10 years,
2. Raising the unit value cap from ₹45 lakhs to ₹90 lakhs,
3. Linking unit value to fair value instead of the ready reckoner value,
4. Removing the sunset clause, and
5. Liberalising constraints related to project and land sizes.

Additionally, the ₹2 lakh cap on home loan interest deductions has become outdated. Raising this cap to ₹5 lakhs would offer immediate relief to families struggling with high EMIs.

Further, employers could be incentivised to build industrial and employee housing through higher depreciation allowances on employee residences. This would address migrant housing shortages while reducing pressure on urban slums.

The Role of States and Cities

State governments and local authorities hold significant power to promote affordable housing through stamp duty and registration charge reductions. Currently, these high charges act as an additional burden on lower- and middle-income households. By reducing these rates for affordable housing projects, immediate relief could be provided.

A responsive regulatory environment that speeds up approvals and reduces red tape can also make projects more viable. Urban development policy should align private and public interests, for example, by offering higher Floor Space Index (FSI) in prime locations for affordable housing projects.

Looking Beyond Housing

Affordable housing can’t be solved in isolation. Urban congestion, job concentration, and land scarcity are interconnected challenges. Long-term strategies must include economic decentralisation, satellite city development, and employment-linked housing incentives.

Conclusion

Land is finite, and housing demand is perpetual. The affordable housing crisis is not inevitable. It’s a result of outdated definitions, mismatched policies, and tax distortions. By recalibrating what “affordable” truly means in 2026 and addressing the fiscal paradox developers face, India can restore balance to its housing market. Prime Minister Narendra Modi’s vision of “Housing for All” can once again become a reality, both socially and commercially, with the right structural reforms.

(Deepesh Chheda is Partner, Dhruva Advisors.)

Views are personal and do not represent the stand of this publication.