The real estate sector contributes nearly 7% to India’s GDP and supports over 70 million jobs, making it a critical pillar of economic growth and urban development. According to Knight Frank India, a supportive fiscal framework in the Union Budget FY 2026–27 can help revive housing demand, attract long-term institutional capital, and push the government’s vision of Housing for All.
Reviving Affordable Housing Demand
Affordable housing has seen a sharp decline in recent years. Homes priced below Rs. 50 lakh accounted for 54% of total housing sales in 2018, but this share fell to 21% in 2025. Despite stable overall housing demand, sales in this segment dropped 17% year-on-year in 2025.
Rising property prices, limited access to formal credit, and lower disposable incomes have hit first-time buyers the hardest. Knight Frank India recommends revising PMAY 2.0 eligibility limits, especially in major cities where home prices far exceed current thresholds. The firm suggests increasing the maximum eligible house value from Rs. 35 lakhs to Rs. 75 lakhs, or aligning it with RBI’s priority sector lending norms, to make the scheme more effective in urban markets.
Higher Tax Relief on Home Loan Interest
To improve affordability and encourage home ownership, Knight Frank India proposes increasing the home loan interest deduction under Section 24(b) of the Income Tax Act. Raising the current cap from Rs. 2 lakhs to Rs. 5 lakhs would provide meaningful relief to middle-income buyers and help stimulate demand, particularly in the affordable segment.
Encouraging Rental Housing for Low-Income Households
While the government’s Affordable Rental Housing Complexes (ARHC) scheme addresses the needs of urban migrants, Knight Frank India believes the Union Budget can do more to support long-term rental housing for low-income households.
Many homes priced below Rs. 50 lakhs remain vacant as owners find rental yields unattractive. To address this, the firm suggests a 100% tax exemption on rental income up to Rs. 3 lakh for homes costing up to Rs. 50 lakh. This would encourage owners to rent out properties and increase the supply of affordable rental homes.
Using Government Land for Rental Housing
Land availability remains one of the biggest hurdles for affordable housing development. Knight Frank India recommends using surplus government-owned land in urban areas, such as land held by railways or defence establishments, to build high-density rental housing.
These homes would be offered only on a long-term rental basis, targeted at households meeting affordable income criteria, and not allowed to be sold in the open market. The government would retain ownership and manage maintenance, ensuring stable and affordable rental supply in key urban locations.
Tax Incentives and Funding for Rental Projects
To improve project viability, Knight Frank India calls for:
- A five-year tax holiday for developers of purpose-built rental housing
- Central government grants or viability gap funding for ARHC projects in Tier-II and Tier-III cities
These measures could attract private participation and institutional capital into the rental housing space.
Making Home Purchases More Tax-Efficient
Under Section 54 of the Income Tax Act, capital gains from the sale of a house can be reinvested in a new property. However, buyers of under-construction homes must complete construction within three years, a timeline that is increasingly unrealistic for large projects.
Knight Frank India recommends extending this completion window to five years. It also suggests allowing buyers two years, instead of one, to purchase a new home before selling their existing property. This would give homeowners greater flexibility and reduce distress sales, especially in a market where older homes are harder to sell.
Supporting Green and Sustainable Buildings
Several states already offer subsidies for green buildings. Knight Frank India proposes a central subsidy programme covering 20–25% of the additional cost of green construction materials and technologies, capped at Rs. 1–2 crore per project. This would encourage sustainable development across the country.
Industry View Ahead of the Budget
Commenting on expectations from the Union Budget FY 2026–27, Shishir Baijal, International Partner, Chairman and Managing Director, Knight Frank India, said the housing sector needs urgent policy recalibration to address structural challenges, especially in affordable housing.
He said, “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. At the same time, India must move decisively towards building a formal, long-term rental housing ecosystem. A supportive regulatory and fiscal framework for rental housing can unlock underutilized stock, improve workforce mobility, and attract patient institutional capital into a segment that remains significantly underserved. Continued investment in urban infrastructure and mass transit will also be crucial to improving access to peripheral growth corridors, expanding affordable land supply and enabling more inclusive urbanization.”
