Expectations from Budget 2025: A comprehensive look at the real estate sector's future

The real estate sector has long been a key driver of economic growth in India, contributing significantly to GDP, job creation, and infrastructure development. However, it remains plagued with many challenges, from affordability issues and slow housing project delivery to regulatory burdens and a lack of rental housing solutions. As we approach Budget 2025, it is essential to address these hurdles and realign policies to stimulate growth, support demand, and make housing more accessible for all.

1. Affordable Housing: Reviving Key Tax Incentives

Affordable housing has been the focus of India's real estate policy in recent years. However, the absence of certain provisions from the Income Tax Act, such as Section 80-IBA, has stunted its potential for growth. Section 80-IBA provided a tax deduction for developers involved in the construction of affordable housing projects, allowing them to claim a 100% deduction on profits derived from such projects. This incentive was pivotal in driving investment into the affordable housing segment and supporting developers in meeting the growing demand.

With the removal of Section 80-IBA, many developers are finding it increasingly difficult to construct affordable housing projects. Budget 2025 should bring back this provision. The tax deduction should apply to all profits derived from affordable housing projects, irrespective of the number of years over which the profit is derived. This will incentivize developers to invest more aggressively in this segment, which is critical for solving India's housing crisis.

2. Revisiting the Definition of Affordable Housing

Currently, the definition of affordable housing limits homes priced up to ₹45 lakh to be classified as affordable. However, the cost of construction and the price of housing have increased substantially over the past decade. To truly make affordable housing a reality in urban India, the definition needs to be updated.

The cap on affordable housing should be increased, with the price to be determined at a city-level. Real estate prices in cities like Mumbai, Bengaluru, and Delhi are much higher than in smaller towns, so an updated pricing structure that reflects the local economic reality is crucial. For instance, in cities with higher land prices, affordable housing could be priced at ₹70 lakh or ₹80 lakh, while in tier-2 or tier-3 cities, the ₹45 lakh cap might still be appropriate. Such flexibility will ensure that the government’s intent to provide affordable housing is met across diverse urban landscapes.

3. Addressing Vacant Housing: Incentives for Rental Housing

A staggering 11 million homes in urban India remain vacant. While there is a huge demand for housing, a considerable number of homes are lying unused. This presents a paradox – how can we drive occupancy for these empty houses and alleviate the housing challenges faced by millions of people?

One possible solution is to provide tax incentives for property owners who rent out their vacant homes. This could include tax breaks or rebates on rental income. Encouraging property owners to rent out their homes would not only help in addressing the housing crisis but also enable them to earn an income from otherwise unused properties.

Additionally, offering tax incentives on loans for purchasing second homes could encourage investments in rental properties, thus expanding the rental housing stock. This would help address the growing demand for rental housing in urban centers, where the population is rapidly expanding.

4. Revising Housing Loan Exemptions: Keeping Pace with Inflation

The current exemption under Section 24B of the Income Tax Act allows a deduction of up to ₹2 lakh per annum on interest paid on housing loans. However, this exemption has not been revised since the 2014 Budget, despite significant inflation and the rising cost of real estate. The ₹2 lakh cap no longer reflects the realities of today’s housing market.

Budget 2025 should revise this exemption to account for inflation and the rising cost of homes. A realistic increase in the deduction limit would help homebuyers reduce their tax burden and make homeownership more affordable. The government should also consider making this exemption applicable across a broader range of property values, allowing more individuals to benefit from this deduction.

5. Reducing the Cost of Construction: Tax Relief on Building Materials

The cost of construction in India has been consistently rising, driven largely by the high tax rates on building materials such as cement and steel, which are taxed at 28%. This tax burden directly impacts the cost of housing, further pushing up prices and making homes less affordable for the average buyer.

In Budget 2025, the government should consider reducing the tax on building materials like cement to 18%. This would lower the cost of construction, reduce the overall cost of homes, and enable developers to pass on these savings to the end consumer. This would also incentivize more developers to undertake large-scale construction projects, further boosting supply in the market.

6. Reintroduce Inflation Adjusted Indexation on Capital Gains

Another critical issue that needs urgent attention in Budget 2025 is the taxation of capital gains on real estate transactions. After the interim budget 2024, properties will be taxed at a rate of 12.5% on long-term capital gains, but there is no provision for indexation, which means that inflation is not factored into the calculation of taxable gains. As a result, the tax burden on property sellers is disproportionately high, particularly in the face of rising property prices due to inflation. To address this, the government should re-introduce an indexation benefit for capital gains tax on real estate. This would adjust the cost of acquisition for inflation, ensuring that sellers are only taxed on the real, inflation-adjusted profits. Such a move would not only make property investment more attractive but also align the tax policy with the economic realities of the market, fostering a more conducive environment for both buyers and sellers.

7. Granting Industry Status to the Real Estate Sector

The real estate sector plays a crucial role in the Indian economy, yet it remains excluded from several benefits available to industries such as manufacturing and services. Granting the real estate sector ‘industry status’ would go a long way in improving access to finance and reducing the cost of capital for developers. This would directly translate into lower housing costs for consumers.

Moreover, granting industry status would allow developers to access cheaper loans and attract more institutional investment, which is currently restricted due to the sector’s non-industrial classification. In turn, this could lead to faster project completion, more affordable housing options, and a thriving real estate market.

8. Simplifying GST on Real Estate

One of the long-standing issues in the real estate sector has been the differential GST rates applied to Ready-to-Move-In (RTMI) properties versus under-construction properties. While under-construction properties are taxed at a higher rate, RTMI properties are exempt from GST. This discrepancy has created a situation where under-construction properties face higher costs, which are eventually passed on to the buyer.

I propose that Budget 2025 look into harmonizing GST rates across all types of real estate transactions. Removing the differential treatment between RTMI and under-construction properties would simplify the tax structure and reduce the overall cost of housing. This would also make the entire sector more transparent, lowering the risk of tax evasion and improving compliance.

Conclusion: A Call to Action for Budget 2025

The real estate sector is at a crossroads, with significant challenges that need to be addressed in Budget 2025. By reintroducing key tax incentives for affordable housing, revising the definition of affordable housing, and addressing issues related to vacant homes and construction costs, the government can create a more conducive environment for growth in this sector.

The measures proposed above are not just about stimulating the economy—they are about ensuring that every Indian has access to a home that is affordable, comfortable, and suited to their needs.

Amit Agarwal is the CEO & Co-Founder of NoBroker.