Budget 2026: Will new tax and rental incentives revive affordable housing demand and boost market?

With the Union Budget for FY27 is just two weeks, India’s real estate sector is sharpening its expectations from the government, looking for a fiscal push that can revive affordable housing, expand rental supply and make home ownership more tax-efficient. Contributing nearly 7% to GDP and employing over 70 million people, real estate remains central to economic growth, job creation and urban transformation. Industry leaders believe a supportive policy framework in Budget 2026 could unlock the next phase of housing-led growth and accelerate the vision of Housing for All.

A key concern is the steady decline in affordable housing sales. Homes priced below Rs 50 lakh accounted for 54% of total sales in 2018, but that share has dropped to just 21% in 2025. Even as overall housing demand has stayed resilient, affordable housing sales fell 17% year-on-year in 2025, reflecting the strain of rising property prices, shrinking disposable incomes and limited access to formal credit.

To revive this segment, the industry is calling for a rethink of existing housing subsidies. Under PMAY 2.0, buyers receive a 4% interest subsidy on loans up to Rs 8 lakh, subject to a total loan cap of Rs 25 lakh and a house value limit of Rs 35 lakh. However, in major cities, home prices often exceed this threshold, making many first-time buyers ineligible. Developers are urging the government to raise the house value limit to Rs 75 lakh, or align it with RBI priority sector norms, to reflect urban cost realities.

Another widely backed proposal is increasing the deduction on home loan interest under Section 24(b) from Rs 2 lakh to Rs 5 lakh to improve affordability for end users.

Alongside ownership, rental housing is emerging as a major policy priority. While the Affordable Rental Housing Complexes (ARHC) scheme has focused largely on urban migrants, industry experts say the Budget should broaden its scope to address the needs of low-income households for whom home ownership remains out of reach.

One proposal gaining traction is a full tax exemption on rental income up to Rs 3 lakh for homes priced below Rs 50 lakh, which could encourage investors to lease out vacant units and boost rental supply in high-demand segments.

Land availability remains another structural challenge. Developers suggest that surplus government land in urban areas—owned by railways, defence forces or other public bodies—could be leveraged for high-density rental housing. Under such a model, homes would be offered strictly for long-term rental to eligible low-income households, with ownership retained by the government to ensure affordability and prevent speculative resale. Complementing this, the sector is also seeking tax holidays for purpose-built rental housing and viability gap funding for ARHC projects in Tier-II and Tier-III cities.

Tax reforms

Tax efficiency in home purchases is another area where reform is being sought. Under Section 54 of the Income Tax Act, capital gains from the sale of a house can be reinvested in a new property, but exemptions on under-construction homes are available only if the project is completed within three years. With large residential developments increasingly taking longer, the industry is urging the government to extend this timeline to five years. There are also calls to relax timelines for buying a new property before selling an old one, giving homeowners greater flexibility in managing capital gains without distress sales.

Shishir Baijal, International Partner, Chairman and Managing Director of Knight Frank India, says affordable housing risks remaining subdued without timely policy recalibration. He stresses the need to realign incentives with today’s urban cost structures and to build a formal, long-term rental housing ecosystem that can unlock underutilised stock and attract institutional capital. Continued investment in urban infrastructure and mass transit, he adds, will be critical to expanding affordable land supply and enabling more inclusive urbanisation.

“With the Union Budget for FY 2027 approaching, the housing sector requires focused intervention to address growing structural imbalances. While residential markets have shown resilience, affordable housing continues to underperform due to declining affordability, elevated input costs, and limited end-user support. Without timely policy recalibration, demand in this critical segment risks remaining suppressed. There is a strong need to realign housing incentives with today’s urban cost structures, particularly in major cities where price thresholds no longer reflect market realities. Targeted fiscal support for homebuyers, along with measures that improve project viability, can help revive both demand and supply," Baijal said.

Sustainability is also firmly on the wish list. While some states offer subsidies for green-certified projects, developers want a central scheme that supports 20–25% of the incremental cost of eco-friendly materials and technologies, capped at Rs 1–2 crore per project, to accelerate the shift towards sustainable construction.